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

The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:

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:

Threats

Changes in the external environmental also may present threats to the firm. Some examples of such threats include:

Doing a SWOT

There is no one right way to do a SWOT analysis.  In fact, it is important to realize that while a SWOT helps guide brainstorming and issue seeking, it does not ensure that the issues identified are either strategic or actionable.  As with any other tool, the skill of the practitioner and the appropriateness of application define the quality of results.  Generally it is helpful to follow a few basic principles:  

Get others involved — A group process that encourages a free flow of ideas and building off each other's input can ensure the robustness of the analysis.  Strong facilitation (read strategic guiding, not overbearing involvement) is necessary to ensure that consultation and engagement add value.   

List the top of mind issues first — It is okay to state the obvious and surface individuals' perspectives.  Getting a "lay of the land" and discovering what others feel is strategic — often an eye opening experience — it can keep analysis from locking into a particular perspective too early in the process. From a practical perspective, having something to put on the blank page is helpful in starting the process.

Find structure — Since the SWOT merely puts issues in high level categories, it is often helpful to add additional structure to the analysis to ensure it covers the appropriate ground.  Normally this means using checklists as an external means to validate the comprehensiveness of the analysis.  Less formal validation of the analysis can be implicit through the use of a seasoned practitioner in the process.   

Generate, cultivate, and harvest — It is better to allow a free flow of ideas rather than analysing and debating every suggestion in depth.  Critiquing every suggested issue is more likely to derail creativity than generate tight analysis.  Issues can be prioritized and culled at a later stage.

Refine through iteration — This should not be understood as a continual questioning of basic principles but as a refining of issues through continual polishing throughout the process.  This approach goes hand in hand with knowing "when to say when".    

Inform the analysis through research — After an initial scan, gaps can often be identified.  A willingness to go away and research and or ask stakeholders targeted questions will ensure that the analysis is more than a summary of opinions.

Don't be motivated by structural aesthetics — While it is tempting to fill in the blanks to make the analysis look pretty (i.e. trying to come up with a weakness for every strength), the tool should inform, not overwhelm, the analysis.  

The SWOT Matrix

From Scanning to Planning 

The art of strategy development involves taking a careful look at the organizational and environmental situations and developing an approach that will encourage organizational success. 

While the SWOT provides a mechanism to provide the prerequisite scan, it does not and should not provide a ready-made strategic plan.

Getting from a scan to a plan is in fact an art.  As mentioned earlier, individual factors should not be taken as individual objectives: there is a need to optimize the mix of organizational efforts to create a best fit between all of the factors. This is where a clear mission is helpful in weighting the importance of the factors that have been identified. Clarity and comprehensiveness in the identification of factors and in the scanning process will ensure that foundation for strategy development is solid and that the planning exercise is not a pretence for repacking current assumptions. 

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity.

To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below:

• S-O strategies pursue opportunities that are a good fit to the companies strengths.

• W-O strategies overcome weaknesses to pursue opportunities.

• S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.

• W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.