Situation Analysis typically involves a search for SWOTs (strengths, weaknesses, opportunities, threats) that affect organizational performance. It is important to all companies but is crucial to those considering globalization because of the diverse environments in which they will operate. This article will discuss SWOT & PEST analyses.
Internal vs. External Analysis
Executives acquire information about internal strengths and weaknesses from a variety of reports including budgets, financial ratios, profit-and-loss statements, and surveys of employee satisfaction.
- Internal Strengths: Positive internal characteristics that an organization can exploit to achieve its strategic performance goals.
- Internal Weaknesses: Characteristics that might inhibit or restrict the organization’s performance.
External information about opportunities and threats may be obtained from a variety of sources including customers, government reports, professional journals, consultants or associations.
- External Threats: Characteristics of the external environment that may prevent the organization from achieving its strategic goals.
- External Opportunities: Characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals.
Executives evaluate the external environment with information about various sectors. The sectors most relevant to strategic behavior include the behavior of competitors, customers, suppliers and the labor supply.
SWOT Analysis is a simple but useful framework for analyzing your organization’s strengths and weaknesses, and the opportunities and threats that you face. It helps you focus on your strengths, minimize threats, and take the greatest possible advantage of opportunities available to you.
SWOT is an acronym that stands for:
- Strengths: factors that give an edge to a firm over its competitors.
- Weaknesses: factors that can be harmful if used against the firm by its competitors.
- Opportunities: favorable situations which can bring a competitive advantage.
- Threats: unfavorable situations which can negatively affect the business.
Benefits of Using SWOT Analysis:
- It can be used to “kick off” strategy formulation, or in a more sophisticated way as a serious strategy tool.
- Simple to use and clear to understand.
- You can also use it to get an understanding of your competitors, which can give you the insights you need to craft a successful competitive position.
- Focuses on the key internal and external factors affecting the company.
- Helps to identify future goals and initiates further analysis.
When carrying out your analysis, be realistic and rigorous. Apply it at the right level, and supplement it with other option-generation tools where appropriate.
Strengths and weaknesses are often internal to your organization, while opportunities and threats generally relate to external factors.
For this reason, SWOT is sometimes called Internal-External Analysis and the SWOT Matrix is sometimes called an IE Matrix.
- What advantages does your organization have?
- What do you do better than anyone else?
- What is your organization’s USP (Unique Selling Proposition)?
- What do people in your market see as your strengths?
- What factors mean that you “get the sale”?
Consider your strengths from both an internal perspective, and from the point of view of your customers and people in your market.
- What could you improve?
- What should you avoid?
- What are competitors in your market likely to see as weaknesses?
- What factors lose you sales?
Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that you don’t see? Are your competitors doing any better than you? It’s best to be realistic now, and face any unpleasant truths as soon as possible.
- What good opportunities are you open to?
- What interesting trends are you aware of and can take advantage of?
- How can you turn your strengths into opportunities?
Note: A useful approach when looking at opportunities is to look at your strengths and ask yourself whether these open up any opportunities. Alternatively, look at your weaknesses and ask yourself whether you could open up opportunities by eliminating them.
- What obstacles do you face?
- What are your competitors doing?
- What threats do your weaknesses expose you to?
- Are quality standards or specifications for your job, products or services changing?
- Is changing technology threatening your position?
Note: When looking at opportunities and threats, PEST Analysis* can help to ensure that you don’t overlook external factors, such as new government regulations, or technological changes in your industry.
Further SWOT Tips
If you’re using SWOT as a serious tool (rather than as a “warmup” for strategy formulation), make sure you’re rigorous in the way you apply it:
- Only accept precise, verifiable statements (“Cost advantage of $10/ton in sourcing raw material x”, rather than “Good value for money”).
- Cut down long lists of factors, and prioritize them, so that you spend your time thinking about the most significant factors.
- Make sure that options generated are carried through to later stages in the strategy formation process – apply it at the right level.
- Use it in conjunction with other strategy tools (for example, USP Analysis and Core Competence Analysis) so that you get a comprehensive picture of the situation you’re dealing with
Note: You could also consider using the TOWS Matrix. This is quite similar to SWOT in that it also focuses on the same four elements. TOWS can be a helpful alternative because it emphasizes the external environment.
For more information on the SWOT Matrix and how to perform a SWOT Analysis, visit this link.
Follow this link to find 30 SWOT Analyses of the best performing companies in the world.
PEST Analysis is an analysis of the Political, Economic, Social and Technological factors in the external environment of an organization, which can affect its activities and performance.
PESTEL Model involves the collection and portrayal of information about external factors which have, or may have, an impact on business. It consists of two additional factors – Environmental & Legal.
PEST or PESTEL Analysis is a simple and effective tool used in situation analysis to identify the key external (macro environment level) forces that might affect an organization.
These forces can create both opportunities and threats for an organization. Therefore, the aim of using PEST is to:
- find out the current external factors affecting an organization.
- identify the external factors that may change in the future.
- to exploit the changes (opportunities) or defend against them (threats) better than competitors would do.
Using the Tool
PEST analysis is also done to assess the potential of a new market. The general rule is that the more negative forces are affecting that market, the harder it is to do business in it. The difficulties that will have to be dealt with significantly reduce profit potential and the firm can simply decide not to engage in any activity in that market.
The process of carrying out PEST analysis includes the following steps:
Step 1: Gathering information about political, economic, social and technological changes + any other factor(s).
Step 2: Identifying which of the PEST factors represent opportunities or threats.
This article is an excerpt from the General Management, Strategy & Leadership module of the 1-year, 100% online Lean MBA™ program. The Lean MBA provides training in 12 functional areas of business administration.