Business 101: Principles of Management

In the business world, as in many other places, decisions aren't made lightly. Rather, management spends a long time considering the pros and cons of every choice. This lesson will teach you about one of the key ways they do that, the SWOT analysis.

'If It Ain't Broke, Don't Try to Fix It'

You've heard the saying 'if it ain't broke, don't try to fix it.' In certain circumstances, this is definitely true; however, in business, it is almost always false. Maintaining a competitive advantage in the marketplace requires organizations to be in a state of constant renewal by examining what they are doing well and what they need to improve on. While an organization may not be 'broke,' so to speak, every organization can be better in some way, shape or form.

SWOT Analysis

One of the most commonly used tools in strategic management and managerial decision-making is known as the SWOT analysis, which is an acronym for strengths, weaknesses, opportunities and threats. The SWOT analysis can be universally applied in a variety of situations, such as introducing a new product to the market, project management, changing distributors, expanding to another location, outsourcing and so on. During a SWOT analysis, an organization will proactively assess its internal environment for strengths and weaknesses and then examine the external environment for opportunities and threats.

A mission statement should be focused on the market and environment.

The internal environment refers to things that go on inside the company that, for the most part, the organization is in control of. Examples of the internal environment include:

• who you hire to work for your organization
• the skills and knowledge of your employees
• the chain of command
• what products or services you offer
• what price you charge your customers
• your margin of profitability

The external environment are those things that occur independent of the organization and are out of the control of the organization. Examples of things in the external environment include:

• conditions in the market
• the perceived value of your product or services to the public
• trends
• competition
• the economy
• technological advancements
• politics
• society

Successful strategic management relies on a thorough and accurate evaluation of both the internal and external environments.

SWOT analysis can be universally applied in a variety of situations.

Remilon Airlines SWOT Analysis

To better understand the SWOT analysis, let's look at this example from Remilon Airlines. After receiving a recent report on the most-traveled destinations in the U.S., Remilon Airlines is interested in expanding its offerings to include five additional, major U.S. cities. Before management can make the decision of whether or not to pursue this expansion, they first need to examine the internal and external environments.

To begin, management first needs to consider the strengths and the weaknesses of the internal environment to determine the feasibility of the expansion. Listing the organization's strengths and weaknesses is the first analysis that needs to be completed. Questions will need to be answered, such as:

• What does Remilon Air do well?
• How stable are the financials, and can they take on the risk of an investment?
• How well has the company performed in the stock market?
• How high or low is employee morale?
• Is the workforce strong enough to absorb the additional work, or will new employees need to be hired and trained?

The second stage involves assessing the external environment for opportunities and threats. Questions again will need to be asked, such as:

• What is the perceived return on investment?
• What advantages will this give the company over the competition?
• Are there any trends that can be taken advantage of as part of this expansion?
• What does the competition offer?
• What is the level of risk that customers will not switch to Remilon Airlines for the new destinations?
• What destinations are riskier than others?
• How will the surrounding communities of the new destinations react to the new airline in their cities?
• Are there any new and emerging technologies that can make the expansion easier for all stakeholders?
• Are the competitors doing especially well in the new markets?
  

  A marketing manager looks internally at the resources of a company.

Once these questions are answered, the managers can begin to place the strengths, weaknesses, opportunities and threats in the appropriate quadrant of the SWOT matrix, a four-quadrant grid similar to what you see on screen now. The managers will need to ensure that any identified weaknesses are offset by the strengths of the organization's internal environment. Working to turn threats into opportunities from the external environment will be the final task for the managers to do now that the SWOT analysis is complete.

Lesson Summary

Let's review. One of the most commonly used tools in strategic management and managerial decision-making is known as the SWOT analysis, which is an acronym for strengths, weaknesses, opportunities and threats. The SWOT analysis can be universally applied in a variety of situations. During a SWOT analysis, an organization will proactively assess its internal environment for strengths and weaknesses and then examine the external environment for opportunities and threats. The internal environment refers to things going on inside the company that, for the most part, the organization is in control of. The external environment are those things that occur independent of the organization and are out of the control of the organization. After conducting the SWOT analysis, managers need to ensure that any identified weaknesses are offset by the strengths of the organization's internal environment and work to turn threats into opportunities from the external environment.