What is an external analysis of the business environment

SWOT analysis

The SWOT analysis is about the consideration of strengths & weaknesses, as well as opportunities & risks of a company and its environment. SWOT stands for S.trengths, W.eakness (weaknesses), Oopportunities, Threats (risks) analysis. With this analysis, the current state of a company can be recorded in order to derive suitable strategic optimization measures.

In the following lesson, you will learn why SWOT analysis is important and how to apply it. At the end of the lesson there are exercises for you to help you internalize the knowledge you have learned.

What is the SWOT analysis?

The necessary measures can be determined on the basis of the analysis of the current situation. In this way, available company potential can be used and the dangers contained.

The following table provides an overview of the SWOT categories with their respective definitions and examples from reality.

Why is the SWOT analysis so important?

  • The SWOT analysis makes it possible
  • to build on strengths
  • to minimize the weaknesses
  • to seize the opportunities
  • identify the threats

With regard to corporate governance, the SWOT analysis can be applied in the following areas:

Internal and external analysis

The SWOT analysis makes it possible to determine a condition description by considering the internal and external factors. The aim is to derive suitable measures.

Internal analysis

The internal analysis describes the current state of the company itself by listing and analyzing the strengths and weaknesses. That is why the internal analysis is also referred to as a company analysis.

The company analysis is therefore an aid in strategic planning. It is used to determine your own strengths and weaknesses and evaluate them in relation to the profile of your competitors.

External analysis

With the external analysis, the current state of the environment is determined by listing and evaluating the possible opportunities and risks. The external analysis is also known as an environment analysis or market analysis. A distinction can be made between the immediate and the indirect environment.

Immediate environment (describes direct influencing factors):
  • Behavior of competitors
  • Development of the branch structure
  • Trends and development tendencies of relevant markets
Indirect environment (describes indirect influencing factors):
  • environment and nature
  • Political developments
  • Wage level and level of education

Examples of internal and external factors

Examples of internal and external factors:

Internal factors (company analysis):
  • Size of the team
  • Business model stability
  • Company location
  • Skills and knowledge of the employees
  • Innovative Products
  • Amount of fixed costs
  • Dependence on partners
  • Dependence on investors
  • Business process efficiency
  • Employee motivation
External factors (environment analysis or market analysis):
  • Market development
  • Development of competition
  • Changes in legislation
  • Technical developments
  • Trends in society
  • Changes in customer behavior
  • politics
  • New target groups
  • Cooperations
  • Macroeconomic situation

Procedure of the SWOT analysis

Basically, the SWOT analysis can be divided into three steps.

  1. Information research: Here the information on the company environment is collected and listed.
  2. State description: All information is now entered accordingly in the SWOT matrix.
  3. Analysis and strategy development: All relationships are analyzed and strategic measures are derived.

In the following, we will address each of these steps and explain them using an example.

The information research

The first step in the SWOT analysis is information research.

The goal is:

  • to recognize the company's internal weaknesses and strengths.
  • determine the environmental factors.
Strengths
  • What went well in the past?
  • What reasons were decisive for previous successes?
  • What can the company be proud of?
  • What can the company do better than its competitors?
Weaknesses
  • Where is the company weak?
  • What has been difficult so far?
  • What is missing?
  • Why are orders being lost to the competition?
Opportunities
  • What are the options?
  • What future opportunities are foreseeable?
  • Which trends are favorable?
  • Which changes in the environment can be beneficial?
Risks
  • Where are the dangers lurking for the current business model?
  • Which developments in the environment could have an unfavorable effect on competitiveness?
  • Which competitor activities can be expected?
Example of information research

The craftsman Schmidt would like to make more profit with his company.

He knows from his customers that the quality of his work is rated very well. He is also known for his punctuality. However, the price for his work is a little higher compared to others. In addition, he can rarely accept spontaneous assignments.

He learned that there are modern craft machines that make work easier. The large number of cheap craftsmen from Eastern Europe made him think.

Mr. Schmidt uses the SWOT analysis and first lists the strengths and weaknesses of his company and describes the external opportunities and risks.

The state description

When describing the situation, the information gathered in relation to other market participants is analyzed and assessed with the aid of the strengths and weaknesses analysis.

  1. First, the financial, physical, technological and organizational resources of your own company are recorded and evaluated.
  2. Then the resources of the competitors are also recorded, evaluated and compared to your own profile.

By comparing them, the competitive advantages and disadvantages can be determined.

Example for the status description
After craftsman Schmidt has identified the strengths, weaknesses, opportunities and risks, he wants to know how competitive his company is.

He knows some craft firms in the region and tries to assess the condition of his company by comparing strengths and weaknesses. For this, Handwerker Schmidt uses the strength-weakness analysis.

Compared to the competition, Handwerker Schmidt realizes that the price and flexibility have to be improved. At the same time, it is important to maintain good service and the quality of the work. Now Mr. Schmidt has to derive the right strategies for his company.

The strategy formation

With the combined SWOT matrix, four relationships can be identified.

  • SO: Strength-opportunities combination
  • ST: Strength-risk combination
  • WHERE: Weakness-chances combination
  • WT: Combination of weakness and risk

Four strategic fields can be derived from the four relationship constellations.

Example of strategy building

After the analysis, Handwerker Schmidt would like to find out what exactly needs to be done in order to expand his chances, catch up on weaknesses, secure strengths and avoid risks.

To do this, he enters the information collected in the SWOT matrix and derives the appropriate strategies from it.

  • SO - strength-opportunities combination: Expansion of service quality through technical equipment.
  • ST - strength-risk combination: Protection against the competition through quality and punctuality
  • WHERE - weakness-chances combination: Lower prices and greater flexibility through better hardware and software.
  • WT - weakness-risk combination: Avoid rigid working hours and excessive prices.

Craftsman Schmidt comes to the conclusion that new machines can offer better quality of work at lower prices. You can also work more flexibly with modern software and accept more spontaneous orders.

Handwerker Schmidt can only keep up with the competition from Eastern Europe through better quality, more punctuality and acceptable prices. With the SWOT analysis, Handwerker Schmidt has recorded the appropriate measures that will make his company more profitable in the future.

Exercise