Strategy

SWOT Analysis

SWOT analysis is generally performed once the initial situation analysis has been performed, and the organisation wishes to confirm what the most important factors are and how they relate to each other in a strategic framework. As such, SWOT analyses are often used in marketing plans as they help companies to explain why they have chosen a specific strategy. SWOT itself stands for the Strengths and Weaknesses of the company and the Opportunities and Threats which exist in the market. SWOT is thus often used by a company to determine what its most important resources are, and what are the most important environmental factors affecting it. In particular, external analyses such as PESTEL will tend to produce a large amount of information. As such, SWOT analyses are required to filter out the least important factors and help the company focus on its key strategic issues. By understanding their key strength and weaknesses and the key opportunities and threats in the marketplace, a company can use its strengths to capitalise on its best opportunities, as well as avoiding damaging threats and correcting any critical weaknesses.

The internal analysis can be seen as an audit of the firm’s resources and capabilities, and how they compare to a benchmark set of resources. These resources include factors such as operational efficiency and capacity; existing financial resources; market share and brand strength; employee skills and knowledge; and any critical natural resources the company controls. The SWOT analysis allows companies to judge which of their resources will be strengths which will enable them to reach their objectives; and which are weaknesses and may need to be improved, developed or added to.

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The external analysis will generally take two forms. The micro-environmental factors, which include customers, competitors, suppliers, market trends and partners, can be analysed using one model, such as Porter’s Five Forces model. The macro-environmental forces, which include political and legal factors, social trends, the economic situation, and impact of technology and the environment can be analysed using another model, such as the PESTEL framework. Once this analysis has been completed, the firm can use the SWOT technique to determine which factor or factors present opportunities which could be exploited, and which may constitute threats to the firm’s current or potential future. The firm can then take actions to exploit the opportunities and deflect or manage any threats.

Limitations of SWOT Analysis

Whilst a SWOT analysis is useful for managing a large number of situational factors and determining the ones which are more important, it can cause companies to view situations as being very simple, and hence ignore some critical strategic interactions which may occur. In particular, classifying factors as strengths, weaknesses, opportunities or threats can be a quite arbitrary method given the high degree of uncertainty in the market. Indeed, with many companies having diverse operations and brands, it is quite possible for a market trend, such as a new technology, to be both a threat and an opportunity. Whilst it could be exploited by a firm, this could cannibalise existing brands and encourage new market entrants. As such, it is important not to get too embroiled in which factors represent an opportunity and which represent a threat, and instead focus on identifying and being aware of the most important factors, and developing a strategy to suit the specific combination of factors. The same is true of strengths and weaknesses, as can be seen by the recent consumer backlash against some of the most successful and profitable brands such as Tesco, Starbucks and McDonald’s.

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