Strength, Weakness, Opportunities and Threats (SWOT) analysis is a technique (or ‘model’) for identifying key factors that might affect business strategy. It is a simple but useful technique for analysing business strategic position.
SWOT analysis is an analysis of strengths, weaknesses, opportunities and threats.
S – Strengths. Strengths are internal strengths that come from the resources of the entity.
W – Weaknesses. Weaknesses are internal weaknesses in the resources of the entity.
O – Opportunities. Opportunities are factors in the external environment that might be exploited, to the entity’s strategic advantage.
T – Threats. Threats are factors in the external environment that create an adverse risk for the entity’s future prospects.
Strengths and weaknesses are concerned with the internal capabilities and core competencies of an entity.
Threats and opportunities are concerned with factors and developments in the environment.
This article focuses on using SWOT analysis as a technique for identifying strategic opportunities and threats in the business environment and competitive environment.
Identifying business opportunities and threats
The following approach is recommended for identifying opportunities and threats in a changing, or possible changes, in the business environment. Opportunities and threats might exist because of the nature of competition in the market or the existence of a strategic space.
To identify opportunities and threats in the business environment, you should consider each aspect of the business environment.
Politically, Economically, Socially, Technologically, Ecologically, and Legally environmental analysis (PESTEL analysis) provides a useful framework. However, whereas PESTEL analysis is used to identify significant factors in the environment, SWOT analysis is used to assess these factors and consider how they might create an opportunity or a threat for the entity.
You should then consider the competitive environment.
a. What is the strength of the competition? You should consider the Five Forces model which are; “Threats from potential entrants, Threats from substitute’s products, Suppliers’ bargaining power, Customers’ bargaining power, and Competitive rivalry”. Are any of the Five Forces likely to change in the future, and if so, how might they change? What effect could this have on the nature of competition (and profitability in the market)?
b. Does the business or product life cycle model offer a useful insight into the market and competition? Is the market in its introductory phase, its growth phase, its maturity phase or its decline phase? Is it likely to move from one phase to the other? If so what might be the consequences for the business?
c. Is the market segmented? What are the existing market segments? Are there gaps in the market, and opportunities for developing new segments?
d. If the market is not segmented now, might it become segmented in the future, and if so what might those market segments be? Is there an opportunity to create a new market segment?
Opportunities should be seen in terms of circumstances (or changes in the environment or in competition) that can be used to increase competitive advantage.
Threats should be seen as circumstances (or changes in the environment or in competition) that will weaken or remove a competitive advantage, or that could give competitors a competitive advantage over you.
It is also worth remembering that some changes in the environment can be both a threat and an opportunity. For example, it can be a threat if competitors of your company or products take advantage of a change in the environment, but it can be an opportunity if your company or product takes the lead and become market leader.