SWOT and ETOP analysis in formulating business strategy

Role of environmental and internal analysis in strategy

A business strategy must fit two things: what the environment offers or threatens, and what the firm is able to do. Strategy formulation therefore begins by analysing both. ETOP concentrates on the external environment; SWOT brings the external and the internal together. Both are diagnostic tools used after the mission and objectives are set and before strategic alternatives are chosen.

SWOT analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.

• Strengths: internal capabilities that give an advantage: strong brand, skilled people, low costs, patents, wide distribution.
• Weaknesses: internal limitations: old technology, high debt, narrow product range, weak marketing.
• Opportunities: favourable external conditions: growing demand, new markets, supportive policy, new technology; spotting them early can give a first-mover advantage.
• Threats: unfavourable external conditions: new competitors, substitutes, regulation, economic slowdown.

The analysis is usually set out in a four-box matrix and then used to match internal factors with external ones:

• S–O strategies use strengths to seize opportunities;
• W–O strategies overcome weaknesses by taking advantage of opportunities;
• S–T strategies use strengths to counter threats;
• W–T strategies minimise weaknesses and avoid threats (defensive or retrenchment moves).

ETOP analysis

ETOP: the Environmental Threat and Opportunity Profile: is a structured summary of the external environment. The environment is divided into sectors (economic, market, technological, social, political, legal, supplier, competitive, international); the important factors in each are listed; each factor is marked as an opportunity or a threat (sometimes with an indication of its strength and importance); and the result shows, at a glance, where the firm faces the most significant opportunities and threats. It sharpens the O and T parts of SWOT and makes environmental scanning systematic.

How the two are used in formulating strategy

1. Diagnosis. ETOP identifies the key external forces; internal appraisal identifies strengths and weaknesses; SWOT combines them.
2. Finding the strategic gap between where the firm is and where its objectives require it to be.
3. Generating alternatives. The S–O, W–O, S–T and W–T combinations suggest concrete strategies: expansion, diversification, alliances, turnaround.
4. Choosing the strategy that best fits the firm's strengths to the most attractive opportunities while guarding against threats.
5. Building competitive advantage by focusing on what the firm does better than rivals.
6. Monitoring: updated SWOT and ETOP profiles show when the strategy needs revision.

Example. A regional ice-cream maker finds, through ETOP, rising demand for healthy desserts and online grocery delivery (opportunities) and entry of national brands (threat); its SWOT shows strong local loyalty and fresh-milk sourcing (strengths) but weak cold-chain reach (weakness). It chooses an S–O strategy of low-sugar products sold through online grocers, and invests in cold storage to cover its weakness.

Limitations

Both are only as good as the information and judgement behind them; listing factors is easier than ranking them; and the analyses describe the position rather than prescribe the strategy.