How to Conduct an Environmental SWOT Analysis - dummies

How to Conduct an Environmental SWOT Analysis

By Herman Aguinis

The first step in conducting a strategic plan for your organization is to step back to take in the “big picture.” You do this what is called an environmental or SWOT analysis (strengths, weaknesses, opportunities, and threats) analysis. An environmental analysis identifies external and internal issues so that you can understand what is going on in the context and industry where your organization operates, enabling you to make decisions about what the performance management system looks like against the backdrop of this broader context.

SWOT analysis graphic
©By buffaloboy/Shutterstock.com

Analyze the external environment

How do you conduct an analysis of the external environment? You need to understand what are the opportunities and threats.

  • Opportunities are characteristics of the environment that can help your organization succeed. Examples of such opportunities might be markets not currently being served, untapped talent pools, and new technological advances.
  • Threats are characteristics of the external environment that can prevent the organization from being successful. Examples of such threats range from economic recession to the launch of innovative products and services on the part of competitors.

A common framework for understanding industry-based threats is the now classic work by Michael E. Porter, called “five-force analysis.” These include three forces from horizontal competition (i.e., the threat of substitute products or services, the threat of established rivals, and the threat of new entrants), and two forces from vertical competition (i.e., the bargaining power of suppliers and the bargaining power of customers).

In addition to the more general five-force analysis proposed by Michael Porter, you need to think about the following more specific factors and how they affect your organization:

  • Economic: For example, is there an economic recession on the horizon? Or is the current economic recession likely to end in the near future? How would these economic trends affect our business?
  • Political/legal: For example, how will political changes domestically or in the international markets we are planning on entering affect our entry strategy?
  • Social: For example, what is the impact of the entry of Millennials in the workforce (and the massive retirement of Baby Boomers)?
  • Technological: For example, what technological changes are anticipated in our industry and how will these changes affect how we do business?
  • Competitors: For example, how do the strategies and products of our competitors affect our own strategies and products? Can we anticipate our competitors’ next move?
  • Customers: For example, what do our customers want now, and what will they want in the next five years or so? Can we anticipate such needs?
  • Suppliers: For example, what is the relationship with our suppliers now and is it likely to change, and in what way, in the near future?

Understanding external trends is critical for business of all sizes. But it is particularly challenging for multinational organizations because they are concerned with both domestic and international trends. Monitoring the external environment is so important in the strategic planning of multinational organizations that a survey of U.S. multinational corporations showed that 89 percent of departments responsible for the assessment of the external environment report directly to a member of the board of directors.

Analyze the internal environment

How do you conduct an analysis of the internal environment? You need to think about strengths and weaknesses.

  • Strengths are internal characteristics that the organization can use to its advantage. For example, what are the organization’s assets and the staff’s key skills? Continuing with the Frontier airlines example I mentioned in a nearby sidebar, several key executives from other airlines were recruited, an important strength that was needed, given the emergence of horizontal threats. These executives created a senior management team with long-term experience in the Denver market.
  • Weaknesses are internal characteristics that hinder the success of your organization. These could include an obsolete organizational structure that doesn’t allow for effective organization across units; the misalignment of organizational-, unit-, individual-level objectives; a talent pool with skills that have become obsolete, given changes in the industry and in technology.

Here are the factors you need to think about in your internal analysis.

  • Organizational structure: For example, is the current structure conducive to fast and effective communication?
  • Organizational culture: Organizational culture includes the unwritten norms and values espoused by the members of the organization. For example, does the current organizational culture encourage or hinder innovation and entrepreneurial behaviors on the part of middle-level managers? Is there a culture in which new ideas and suggestions are quickly suppressed with the argument that “this has never been done before”?
  • Politics: For example, are the various units competing for resources in such a way that any type of cross-unit collaboration is virtually impossible? Or are units open and collaborative in cross-unit projects?
  • Processes: For example, are the supply chains working properly? Are all touchpoints with customers working properly? Can customers reach us when they need to and receive a satisfying response when they do?
  • Size: For example, is the organization too small or too large? Is it growing too fast? Can it manage growth (or downsizing) effectively?

The table below includes a summary list of external and internal trends to be considered when you conduct an environmental analysis.

Think about your current employer and take a look at this table. Where does your organization stand in regard to each of these important external and internal issues? Regarding the external issues, what are some of the opportunities and threats? Regarding the internal issues, what are some of the strengths and weaknesses?

Trends to Consider When Conducting an Environmental Analysis
External Factors Internal Factors
Driven by the line manager

Driven by strategic business considerations

Driven by HR

Driven by operational/administrative issues

Political/legal Organizational culture
Social Politics
Technological Processes
Competitors Size
Customers
Suppliers

How to conduct a gap analysis

Now that you know the external and internal issues facing your organization, you can use information on opportunities, threats, strengths, and weaknesses to do a gap analysis.

With a gap analysis, you look at the external environment in relation to the internal environment. Essentially, you pair external opportunities and threats with internal strengths and weaknesses so that you can learn whether or not you are facing a competitive situation as ranked rom most to least competitive in the following list:

  • Opportunity + Strength = Leverage. The best combination of external and internal factors happens when there is an opportunity in the environment and a matching strength within the organization to take advantage of that opportunity. These are obvious directions that the organization should pursue.
  • Opportunity + Weakness = Constraint. In a constraint situation, the external opportunity is present; however, the internal situation isn’t conducive to taking advantage of the external opportunity. At IBM (see the nearby sidebar), this situation could have taken place if IBM did not have the internal capabilities to develop software and other products for the network-connected devices and specialized components. The external opportunity would still be there, but, absent the internal capabilities, it would not turn into an advantageous business scenario.
  • Threat + Strength = Vulnerability. In this situation, there is an external threat, but this threat can be contained because of the presence of internal strengths. If this had been the case at IBM, the company would not have been able to take advantage of a new situation; nevertheless, existing strengths would have allowed IBM to continue to operate in other areas.
  • Threat + Weakness = Problem. In the worst scenario, there is an external threat and an accompanying internal weakness. For example, in the 1980s, IBM refused to adapt to the demands of the emerging microcomputer market (today’s personal systems including desktops, laptops, and notebooks). IBM did not have the internal capability to address customers’ needs for personal systems, and instead, continued to focus on its internal strength: the mainframe computer. IBM’s poor performance in the early 1990s was a direct consequence of this problem situation: the external threat (increasing demand for personal systems and dwindling demand for mainframe computers) was met with an internal weakness (lack of ability to shift internal focus from the mainframe to the personal systems and devices).