5.5 Combining External and Internal Analysis: SWOT, TOWS and Gap Analysis

5.5 Combining External and Internal Analysis: SWOT, TOWS and Gap Analysis

Executive Summary: Strategic analysis is only useful when the external findings (Chapters 2 and 3) and the internal findings (Chapters 4 and 5) are brought together. SWOT summarises the most important strengths, weaknesses, opportunities and threats; the TOWS matrix turns them into strategic options; and gap analysis measures how far current performance falls short of where the organisation wants to be.

SWOT Analysis

A SWOT analysis sorts the key findings into four boxes. Strengths and weaknesses are internal and largely within the organisation's control; opportunities and threats are external and arise from the remote and industry environment.

A good SWOT is short, specific and evidence-based. Common errors are:

• Listing actions as opportunities. "Open an online store" is a strategic option, not an opportunity; the opportunity is "rapid growth in online purchasing in our category".
• Vague items. "Good staff" is weak; "lowest staff turnover in the industry at 6 percent" is a strength.
• Ignoring relativity. A strength must be judged against competitors and the key success factors of the industry (Section 3.2). A capability every rival has is not a distinctive strength.
• Too many items. Prioritise the five or six factors in each box that genuinely affect strategy.
• Mixing internal and external. A competitor's new product is a threat, not a weakness.

The TOWS Matrix: From Analysis to Options

Heinz Weihrich's TOWS matrix crosses internal factors with external factors to generate four kinds of strategy:

Worked illustration: a regional Australian winery has a strong cellar-door brand (S), weak online sales capability (W), growing export demand in Asia (O) and rising freight costs and new tariffs in one key market (T).

• SO: use the cellar-door brand story in an Asian export campaign aimed at premium buyers.
• WO: partner with an e-commerce fulfilment provider to build online sales quickly.
• ST: use brand loyalty to shift volume toward domestic premium channels less exposed to freight costs.
• WT: reduce dependence on the tariff-affected market and cut low-margin lines to protect cash.

The TOWS matrix produces options; it does not choose between them. Options are evaluated in Module 5 (Chapters 9 and 10).

Prioritising SWOT Factors

Not every factor matters equally. Two simple tests help focus the analysis:

1. Impact: how much would this factor change revenue, cost, risk or the organisation's ability to meet its objectives?
2. Evidence: is the factor supported by data from the case (market figures, financial ratios, customer feedback, competitor comparisons), or is it an assumption?

Factors that score high on both deserve most attention. Some analysts weight external factors by likelihood and impact, and internal factors by their importance to the industry's key success factors, producing a short ranked list. A ranked SWOT also makes the later TOWS step easier, because the strongest options usually come from combining the highest-ranked factors.

Using SWOT well in an exam answer

• Write each factor as a short, specific statement with its evidence ("Customer retention fell from 82% to 71% in two years").
• Keep internal and external factors in the right boxes.
• Limit each box to the factors that matter for the question asked.
• Move straight from the SWOT to implications or options; a SWOT that is not used earns little.

Gap Analysis

Gap analysis compares where the organisation is heading with where it wants to be. Two forms are common:

1. Performance (planning) gap: the difference between a target (for example, revenue of $80 million in five years) and a forecast of what current strategies will deliver (for example, $62 million). The $18 million gap must be closed by improving efficiency and penetration of existing markets, by developing new products or markets, or by diversification—the growth vectors of the Ansoff matrix (Section 6.1).
2. Capability gap: the difference between the resources and capabilities a strategy needs and those the organisation has (Section 5.3), closed by building, borrowing or buying.

A practical sequence for closing a planning gap is to start with the lowest-risk moves and work outward: first improve efficiency and margins in the existing business, then increase penetration of existing markets, then develop new products or enter new markets, and only then consider diversification. This mirrors the rising risk across the Ansoff matrix and helps the board see how much of the target depends on uncertain new ventures.

A useful insight from combining external and internal analysis is that a strategic driver often appears where an external opportunity meets an internal weakness. If customers increasingly expect digital service and the organisation has almost no digital capability, that gap becomes a priority driver for strategy development.

Leadership and Management Implications for Internal Analysis

Internal analysis is uncomfortable because it exposes weaknesses that leaders may have created. Leaders should:

• encourage honest, evidence-based assessment rather than defensive self-description;
• guard against confirmation bias by testing strengths against competitor data;
• involve people from different functions and levels, who see different parts of the picture;
• use the findings to set priorities, not to assign blame.

CPAs contribute by supplying reliable data, building performance measures and challenging claims that are not supported by evidence.