All companies face various internal and external forces that, on the one hand, can lead to potential incentives, but on the other hand, they may involve limitations to the performance or objectives that the company wants to achieve. The strategic planning system begins with a strategic analysis of the company and its environment to detect the factors that can facilitate or make it difficult to reach its maximum potential. This list of strategic, internal and external factors can be used as a starting point to develop the company’s strategic plan and decide on the most appropriate actions to be carried out.
The SWOT analysis (Weaknesses, Threats, Strengths and Opportunities) culminates in the strategic analysis phase, as it synthesises the key questions about the business environment and the strategic capacity of an organization that can affect the development of the strategy. It can also be useful as a starting point for generating strategic options and assessing future courses of action.
To facilitate the study of the various elements identified in the strategic analysis, it is useful to classify them, in addition to their internal or external nature, in accordance with their potential effects on the company. Thus, it is possible to differentiate between potentially negative and potentially positive elements to achieve the desired objectives.
The external analysis provides information about the threats and opportunities that the company is facing today or in the near future.
Although it is possible to do SWOT analysis for a company as a whole, including several businesses, its use is more desirable for lower levels, such as the business or the product
Examples of threats
The entry of foreign competitors with lower costs, the slowdown in market growth, the growing negotiating power of customers or others.
The opportunities included in the evaluation process were very positive in the analysis of the general environment, as well as those that increase the attractiveness of the industry or the segment in which the company operates.
Examples of opportunities
The disappearance of a competitor, the elimination of commercial barriers in attractive foreign markets, the appearance of technology capable of lowering production costs, etc.
The internal analysis allows to know what are the main weaknesses and strengths of the company, as a result of the review of its strategic profile, its value chain and its resources and capabilities.
• Weaknesses include all of those that employ this type of company (compared with others), as well as any condition that places it unfavorable to competition. While defaults are not corrected, the company will see its ability to act in an appropriate manner. The degree to which a weakness can make the company competitively vulnerable depends on the importance of this factor for the competitive success in this industry.
Examples of weaknesses
For instance, having obsolete facilities, a weak image in the market, a limited product line, employees with a degree of inadequate training, high unit costs compared to key competitors, etc.
• Strengths refer to the characteristics that provide an important capacity and any element that gives the company a favorable situation in the market. From the point of view of formulating a strategy, the strengths are important because they can be used as the cornerstone of the strategy, that is, as a basis on which to build the competitive advantage.
Examples of strengths
Have adequate financial resources, have an extensive distribution network, ability to innovate products, an advantageous position in the curve of experience, etc.
This list of internal and external factors is usually generated by members of the management team, as they know each other well The business and can detect which trends can be more relevant.
When facing complex competitive situations, a consulting firm can provide data on the evolution of the sector and provide methodological support during the executive sessions of the managers.
Some history of SWOT analysis
SWOT analysis was developed in the sixties at Harvard University. Its use spread rapidly in the seventies thanks to the basic assumption that the managers could plan an adequate adjustment of the resources of the company with its surroundings. In the eighties, the paradigm of the industrial organization of Micha-Porter and its model of the five competitive forces gave priority to the analysis of the company’s environment and obscured the popularity of the analysis SWOT But in the 1990s, the focus on resources and capabilities highlighted the importance of internal analysis and SWOT reappeared as the framework that allowed connecting internal and external analysis. Currently, the DAFO analysis continues to be popular and is a recommended tool for case study in numerous marketing and strategic management manuals.
Using the DAFO analysis
The SWOT analysis does not end when obtaining a list of internal and external factors that can affect the competitive position of the company. After this step, it is necessary to evaluate these factors to determine their relative importance and reflect on them to formulate appropriate strategic options.
1) Evaluation of the strategic factors
The relevant factors identified in the internal and external analysis may have significant importance for different companies. In addition, it is likely that not all identified elements will have the same likelihood of occurrence in the immediate future. For this reason, it is necessary for the management of the company to evaluate the SWOT analysis factors and thus highlight what really matters.
To evaluate the strategic factors, it is necessary to put them in their proper context. One factor can only be considered favorable or unfavorable in comparison with some reference, internal or external.
The scale used for the assessment can be as simple or sophisticated as the direction you want, as long as it allows to quantify the relevance of each strategic factor for the company analyzed.
In order to assess the weaknesses, strengths, threats and opportunities it is possible to apply given the following techniques:
• A single evaluation can be used to quantify the subjective or implicit impact of the various strategic factors on a specific scale. Some authors propose to assess the scores of external factors due to the probability of occurrence.
• Some authors suggest giving a positive score to the strengths of the company that can help them to take advantage of or solve the problems that arise from a change in the environment or when it can to compensate for a weakness thanks to the aforementioned change. A negative score, on the other hand, will indicate that a strength will diminish for this change in the environment or that some weakness will prevent the organization from overcoming the problems generated by this change.
• Finally, there are other authors using quantitative-specific techniques, based on analytical processes, to try to measure the dependence between the strategic factors.