3.2 Environmental Analysis and SWOT

The Environmental Analysis

Once the environmental (or PESTLE) scan is completed, an analysis needs to be conducted to determine which, if any, of the identified trends may impact the organization. The impact could present a possible opportunity for the organization, or SBU, it could present a possible threat, or it could be both. There will be a number of trends that do not have any potential impact.  This stage calls for creativity as being able to take advantage of a trend may be the way to provide product differentiation.

SWOT Analysis

Up to this point, we have focused on the environments outside of our organization.  The final step takes an even narrower focus by centering on an individual firm. Specifically, a SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the opportunities and threats that exist in the firm’s environment.  Strengths and weakness are aspects of the organization that are internal and controllable.  Opportunities and threats are external to the organization and uncontrollable.  In other words, opportunities and threats are the trends identified in the environmental analysis.

Figure 3.2.1: Business and Chess

description of image: Strengths – Organizational example: having high-levels of cash flow gives firms discretion to purchase new equipment if they wish to.  Individual example: Strong technical and language skills, as well as previous work experience, can help individuals rise above the competition.; Weaknesses – Organizational example: dubious leadership and unethical behaviors have plagued corporations in recent years. Individual example: poor communication skills keep many job seekers from being hired into sales and supervisory positions; Opportunities – Organizational example: The high cost of gasoline creates opportunities for substitute products base on alternative energy sources.  Individual example: the world economy is increasingly services based, suggesting that individual can enjoy more opportunities in service firms; Threats – Organizational example: concerns about worldwide pollution are a threat to petroleum-based products.  Individual Example: A tight job market poses challenges to new graduates

Executives using SWOT analysis compare these internal and external factors to generate ideas about how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm to leverage its strengths, steer clear of or minimize its weaknesses, capitalize on opportunities, and protect itself against external threats. For example, untapped overseas market opportunities have presented potentially lucrative market opportunities to Subway. Meanwhile, Subway’s strengths include a well-established brand name and a simple business format that can easily be adapted to other cultures. In considering the opportunities offered by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway currently has operations in over 100 nations.  Of course, other restaurant chains such as McDonald’s and KFC also see this overseas opportunity, and are external threats to Subway’s success (Wikipedia, 2014).

A SWOT analysis is helpful to executives and managers, and is used within most organizations. Important cautions need to be offered about SWOT analysis, however. First, in laying out each of the four elements of SWOT, internal and external factors should not be confused with each other. Strengths and weaknesses are internal to the firm’s environment: they are within the company.  The external environment includes opportunities and threats in the business community outside the company. It is important not to list strengths as opportunities, for example, if executives are to succeed at matching internal and external concerns during the idea generation process.

Second, opportunities should not be confused with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the opportunity presented to Subway, and entering those markets is a way for Subway to exploit the opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation, which is inherently complex. As a result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting point for executives’ efforts to craft strategies for their organization, not an ending point.

In addition to organizations, individuals can benefit from applying SWOT analysis to their personal situation. A college student who is approaching graduation, for example, could lay out his or her main strengths and weaknesses and the opportunities and threats presented by the environment. Suppose, for instance, that this person enjoys and is good at helping others (a strength) but also has a rather short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at the rehabilitation center (where her strength at helping others would be a powerful asset) rather than entering graduate school (where a lot of reading is required and her short attention span could undermine her studies).

Format

Typically, the SWOT analysis is presented in a graphic format for quick reference followed by a more detailed explanation.  In a report, the graphic should be preceded by a sentence or two telling the reader what they will be seeing. A graphic should never be presented without some kind of introduction.

Figure 3.2.2: SWOT Analysis

image description: Internal / Positive (helpful) – STRENGTHS (well equipped office and labs, competent leadership, diverse team skills, motivated and synergized teams, years of experience, creditworthiness, well-established management systems, IT savvy.  Internal / Negative (harmful) – WEAKNESSES (irregular board meetings, lack of strategic planning, lack of succession plans for the future, uncertain funding sources, overload of work, lack of security of Information, business information leakages.  External / Positive (helpful) – OPPORTUNITIES: investment opportunities, low interest rates, work experience / professional growth, industry exposure, networking, market credibility, innovation, government subsidies.  External / Negative (harmful) – THREATS: lack of external funding, inflationary trends, unstable business environments, change in government policies, no availability of competent personnel in the market, team members personal/health issues, high rate of employees’ insurance.

image courtesy of Khadija Kahn, https://www.researchgate.net/figure/An-Example-of-SWOT-Analysis-adopted-from-various-sources-24_tbl2_343500833

You Try It!

In the following chart, assume that you are conducting a SWOT for Taco Bell. 

Conclusion

All strategic decisions and discussions need to be based on current information and situations. A consistently and constantly updated SWOT analysis allows the employees of an organization to feel confident that they are making the best decisions possible.  To construct a SWOT analysis, an environmental scan need to be conducted followed by an environmental analysis.