By Erica Olsen Published on 05-04-10
Internal & External Analysis

SWOT Analysis

 

SWOT is an acronym used to describe the particular Strengths, Weaknesses, Opportunities, and Threats that are strategic factors for a specific company. A SWOT analysis should not only result in the identification of a corporation’s core competencies, but also in the identification of opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources. (Wheelen, Hunger pg 107)

The SWOT analysis framework has gained widespread acceptance because it is both simple and powerful for strategy development. However, like any planning tool, SWOT is only as good as the information it contains. Thorough market research and accurate information systems are essential for the SWOT analysis to identify key issues in the environment. (Marketing and Its Environment, pg 44)

Assess your market:

  • What is happening externally and internally that will affect our company?
  • Who are our customers?
  • What are the strengths and weaknesses of each competitor? (Think Competitive Advantage)
  • What are the driving forces behind sales trends?
  • What are important and potentially important markets?
  • What is happening in the world that might affect our company?
  • What does it take to be successful in this market? (List the strengths all companies need to compete successfully in this market.)

Assess your company:

  • What do we do best?
  • What are our company resources – assets, intellectual property, and people?
  • What are our company capabilities (functions)?

Assess your competition:

  • How are we different from the competition?
  • What are the general market conditions of our business?
  • What needs are there for our products and services?
  • What are the customer-market-technology opportunities?
  • What are the customer’s problems and complains with the current products and services in the industry?
  • What “If only….” Statements does a customer make?

Opportunity an area of “need” in which a company can perform profitably.

Threat

A challenge posed by an unfavorable trend or development that would lead (in absence of a defensive marketing action) to deterioration in profits/sales.

An evaluation needs to be completed drawing conclusions about how the opportunities and threats may affect the firm.

EXTERNAL: MACRO- demographic/economic, technological, social/cultural, political/legal MICRO- customers, competitors, channels, suppliers, publics INTERNAL RESOURCES: the firm

Competitor analysis is a critical aspect of this step.

  • Identify the actual competitors as well as substitutes.
  • Assess competitors’ objectives, strategies, strengths & weaknesses, and reaction patterns.
  • Select which competitors to attack or avoid.

The Internal Analysis of strengths and weaknesses focuses on internal factors that give an organization certain advantages and disadvantages in meeting the needs of its target market. Strengths refer to core competencies that give the firm an advantage in meeting the needs of its target markets. Any analysis of company strengths should be market oriented/customer focused because strengths are only meaningful when they assist the firm in meeting customer needs. Weaknesses refer to any limitations a company faces in developing or implementing a strategy (?). Weaknesses should also be examined from a customer perspective because customers often perceive weaknesses that a company cannot see. Being market focused when analyzing strengths and weaknesses does not mean that non-market oriented strengths and weaknesses should be forgotten. Rather, it suggests that all firms should tie their strengths and weaknesses to customer requirements. Only those strengths that relate to satisfying a customer need should be considered true core competencies. (Marketing and Its Environment, pg 44)

The following area analyses are used to look at all internal factors effecting a company:

  • Resources: Profitability, sales, product quality brand associations, existing overall brand, relative cost of this new product, employee capability, product portfolio analysis
  • Capabilities: Goal: To identify internal strategic strengths, weaknesses, problems, constraints and uncertainties

The External Analysis examines opportunities and threats that exist in the environment. Both opportunities and threats exist independently of the firm. The way to differentiate between a strength or weakness from an opportunity or threat is to ask: Would this issue exist if the company did not exist? If the answer is yes, it should be considered external to the firm. Opportunities refer to favorable conditions in the environment that could produce rewards for the organization if acted upon properly. That is, opportunities are situations that exist but must be acted on if the firm is to benefit from them. Threats refer to conditions or barriers that may prevent the firms from reaching its objectives. (Marketing and Its Environment, pg 44)

The following area analyses are used to look at all external factors effecting a company:

  • Customer analysis: Segments, motivations, unmet needs
  • Competitive analysis: Identify completely, put in strategic groups, evaluate performance, image, their objectives, strategies, culture, cost structure, strengths, weakness
  • Market analysis: Overall size, projected growth, profitability, entry barriers, cost structure, distribution system, trends, key success factors
  • Environmental analysis: Technological, governmental, economic, cultural, demographic, scenarios, information-need areas Goal: To identify external opportunities, threats, trends, and strategic uncertainties

The SWOT Matrix helps visualize the analysis. Also, when executing this analysis it is important to understand how these element work together. When an organization matched internal strengths to external opportunities, it creates core competencies in meeting the needs of its customers. In addition, an organization should act to convert internal weaknesses into strengths and external threats into opportunities.

Focus on your strengths. Shore up your weaknesses. Capitalize on your opportunities. Recognize your threats.

Identify

  • Against whom do we compete?
  • Who are our most intense competitors? Less intense?
  • Makers of substitute products?
  • Can these competitors be grouped into strategic groups on the basis of assets, competencies, or strategies?
  • Who are potential competitive entrants? What are their barriers to entry?

Evaluate

  • What are their objectives and strategies?
  • What is their cost structure? Do they have a cost advantage or disadvantage?
  • What is their image and positioning strategy?
  • Which are the most successful/unsuccessful competitors over time? Why?
  • What are the strengths and weaknesses of each competitor?
  • Evaluate competitors with respect to their assets and competencies.

Size and Growth What are important and potentially important markets? What are their size and growth characteristics? What markets are declining? What are the driving forces behind sales trends?

Profitability For each major market consider the following: Is this a business are in which the average firm will make money? How intense is the competition among existing firms? Evaluate the threats from potential entrants and substitute products. What is the bargaining power of suppliers and customers? How attractive/profitable are the market now and in the future?

Cost Structure What are the major cost and value-added components for various types of competitors?

Distribution Systems What are the alternative channels of distribution? How are they changing?

Market Trends What are the trends in the market?

Key Success Factors What are the key success factors, assets and competencies needed to compete successfully? How will these change in the future?

Environmental Analysis An environmental analysis is the four dimension of the External Analysis. The interest is in environmental trends and events that have the potential to affect strategy. This analysis should identify such trends and events and the estimate their likelihood and impact. When conducting this type of analysis, it is easy to get bogged down in an extensive, broad survey of trends. It is necessary to restrict the analysis to those areas relevant enough to have significant impact on strategy.

This analysis is divided into five areas: economic, technological, political-legal, sociocultural, and future.

Economic What economic trends might have an impact on business activity? (Interest rates, inflation, unemployment levels, energy availability, disposable income, etc)

Technological To what extent are existing technologies maturing? What technological developments or trends are affecting or could affect our industry?

Government What changes in regulation are possible? What will their impact be on our industry? What tax or other incentives are being developed that might affect strategy development? Are there political or government stability risks?

Sociocultural What are the current or emerging trends in lifestyle, fashions, and other components of culture? What are there implications? What demographic trends will affect the market size of the industry? (growth rate, income, population shifts) Do these trends represent an opportunity or a threat?

Future What are significant trends and future events? What are the key areas of uncertainty as to trends or events that have the potential to impact strategy?

Internal Analysis Understanding a business in depth is the goal of internal analysis. This analysis is based resources and capabilities of the firm.

Resources A good starting point to identify company resources is to look at tangible, intangible and human resources.

Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm’s financial statements.

Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and technological assets (proprietary technology and know-how).

Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.

RESOURCE MAIN CHARACTERISTICS KEY INDICATORS
Tangible
Financial The firm’s borrowing capacity and its internal funds generation determines its capacity to weather fluctuations in demand and profits overtimes.
  • Debt to equity ratio
  • Ration of net cash to capital expenses
  • Credit rating
Physical The physical resources related to plan, equipment, assets, technology, raw materials.
  • Resale value of assets
  • Age of capital equipment
  • Flexibility of PPE
Intangible
Technological Stock of technology in the form of proprietary technology (copyright, patents, trade secrets) and expertise in the application of technology (know-how).
Reputation Reputation with customers through the ownership of brands, established relationships with customers, reputation of the firm’s products and services.Reputation of the company with suppliers, employees, etc.
  • Brand recognition
  • Price premium over competing brands
  • Percent of repeat buying
  • Level and consistency of company performance
Human Resources Training and expertise of employees determine the skills available to the firm.Adaptability of employees determines key aspects of strategic flexibility of the firm.Commitment and loyalty of employees determines the capacity of the firm to attain and maintain competitive advantage.
  • Educational, technical and professional qualifications of employees
  • Compensation relative to industry
  • Record of labor disputes
  • Employee turnover

Capabilities

Resources are not productive on their own. The most productive tasks require that resources collaborate closely together within teams. The term organizational capabilities is used to refer to a firm’s capacity for undertaking a particular productive activity. Our interest is not in capabilities per se, but in capabilities relative to other firms. To identify the firm’s capabilities we will use the functional classification approach. A functional classification identifies organizational capabilities in relation to each of the principal functional areas.

Functional Area Capability
Corporate
  • Financial management
  • Expertise in strategic control
  • Effectiveness in motivating and coordinating business units
  • Management of partnerships
  • Overall company management/ resource management
Information Management
  • Comprehensive and effective information system that can be used for managerial decision making
Research and Development
  • Capability in basic research
Product Design
  • Design capability
Marketing
  • Brand management and promotion
  • Promotion and exploiting reputation for quality
  • Understand of and responsiveness to market trends
Sales and Fulfillment
  • Effectiveness in promoting and executing sales
  • Efficiency and speed of fulfillment
  • Quality and effectiveness of customer service

Erica Olsen

Erica Olsen is the COO and a co-founder of OnStrategy. She has developed the format and the user interface for the award-winning OnStrategy on-line strategic management system. In addition, she is the author of Strategic Planning Kit for Dummies, 2nd Edition. Erica has developed and reviewed hundreds of strategic plans for public and private entities across the country and around the world. She is a lecturer at University of Nevada Reno and University of Phoenix. She holds a BA in Communications and an MBA in International Management.