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Director Development Centre

Principal: Richard Winfield

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Review and evaluate present and future Strengths, Weaknesses, Opportunities and Threats*

A scan of the internal and external environment is an important part of the strategic planning process.

Two tools are helpful here.

The PESTEL or PESTER (PEST) analysis is a useful tool for understanding the "big picture" of the environment in which you are operating, and the opportunities and threats that lie within it. It is often used within a strategic SWOT analysis.

SWOT analysis is a strategic planning method used to evaluate a project or a business venture. A SWOT analysis must first start with defining a desired end state or objective and then identifying the internal and external factors that are favourable and unfavourable to achieve that objective.

PEST analysis – Scanning the external environment

External environmental factors are normally outside our control, but can have a major impact on performance. It is important, therefore, that they are monitored and, where possible, forecast, and incoporated into strategic planning.

PEST analysis helps ensure that an organisation is able to align its strategy with the powerful forces of change that are affect the working environment.

PEST analysis helps understand risks associated with market growth or decline, and as such the position, potential and direction for a business or organisation. It is often used as a generic 'orientation' tool, finding out where an organisation or product is in the context of what is happening outside that will at some point affect its performance.

The environmental factors most often studied are political (P), economic (E), social (S), technological (T), environmental (E) and legal (L) or regulatory (R).

SWOT analysis

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.

SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined.

The SWOT analysis provides information that is helpful in matching an organisation's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection.

The Key Distinction - Internal and External Issues

Strengths and weaknesses are internal factors. For example, a strength could be your specialist marketing expertise. A weakness could be the lack of a new product.

Opportunities and threats are external factors. For example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete.

The SWOT analysis is particularly helpful in identifying areas for development

The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. These come from within the company's unique value chain. SWOT analysis groups key pieces of information into two main categories:

• Internal factors – The strengths and weaknesses internal to the organisation
• External factors – The opportunities and threats presented by the external environment to the organisation. Use a PEST analysis to help identify factors

The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective.

The factors may include all of the 4P's of the marketing mix (Product, Place, Price, Promotion); as well as personnel, finance, manufacturing capabilities, and so on.

The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position.

The results are often presented in the form of a matrix.

Strengths	Weaknesses
Opportunities	Threats

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

Strategies matrix

SWOT analyses can be used to compare options and strategies for desirability, risk and resilience. Or, different strategies can be developed to deal with the four categories: strengths/opportunities, weaknesses/opportunities, strengths/threats and weaknesses/threats.

The results are often presented in the form of a matrix.

	Strengths	Weaknesses
Opportunities	Strategies to pursue opportunities that are a good fit to the company's strengths	Strategies to overcome weaknesses to pursue opportunities
Threats	Strategies to identify ways that the firm can use its strengths to reduce its vulnerability to external threats	Strategies to establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats

Corporate governance

Does your board review and evaluate present and future opportunities, threats and risk in the external environment; and current and future strengths, weaknesses and risks relating to the organisation?

• Recognise that past trends may not simply be extrapolated into the future?

• Consciously seek to make objective, unbiased judgements?

• Incorporate input from external specialists when appropriate?

• Evaluate the probabilities or risks of different future outcomes?

• Compare various measures of performance against those of other relevant organisations?

* Inspired by the Institute of Directors Standards for the Board