54 Strategic Analysis: External and Internal

54.1 What is Strategic Analysis?

Strategic analysis is the systematic study of an organisation’s external environment and internal capabilities to identify opportunities, threats, strengths and weaknesses that shape its strategic choices. It is the diagnostic phase of the strategic-management process — formulation comes next (thompson2020?).

Strategic analysis breaks into two halves:

Two Halves of Strategic Analysis

Half	Concerned with	Output
External analysis	Industry, market, macro environment	Opportunities and threats
Internal analysis	Resources, capabilities, value chain	Strengths and weaknesses

The two halves come together in the classical SWOT matrix.

54.2 SWOT Analysis

SWOT — Strengths, Weaknesses, Opportunities, Threats — is the simplest and most-used integrative framework. It traces back to Albert Humphrey’s SOFT analysis at SRI in the 1960s and was popularised at Harvard by Kenneth Andrews (andrews1971?).

The SWOT 2×2

	Helpful	Harmful
Internal	Strengths	Weaknesses
External	Opportunities	Threats

The strategic move is the TOWS matrix — match internal capabilities with external situation:

TOWS Matrix — From SWOT to Strategy

	Strengths	Weaknesses
Opportunities	SO — Use strengths to exploit opportunities	WO — Overcome weaknesses to grasp opportunities
Threats	ST — Use strengths to defuse threats	WT — Defensive — minimise weaknesses and avoid threats

54.3 External Analysis — Macro Environment

The macro environment is studied through PESTEL analysis — Political, Economic, Social, Technological, Environmental, Legal. Earlier acronyms — PEST, PESTLE, STEEPLE — are variations.

The PESTEL Framework

Factor	Examples
Political	Stability, government policy, taxation, trade barriers
Economic	Growth rate, inflation, interest rates, exchange rates
Social	Demographics, lifestyle, culture, education
Technological	R&D, innovation, automation, digital change
Environmental	Climate, sustainability, pollution, ESG
Legal	Employment law, antitrust, consumer law, IP

54.4 External Analysis — Industry: Porter’s Five Forces

Michael Porter’s Five Forces framework (1979, 1980) is the tool for industry analysis. It identifies the five competitive forces that determine the attractiveness (long-run profit potential) of an industry (porter1980?).

Porter’s Five Forces

Force	What it asks	Drivers
Threat of new entrants	How easy is it for new firms to enter?	Economies of scale, capital, brand, regulation
Bargaining power of buyers	How much pricing power do customers have?	Concentration, switching costs, product differentiation
Bargaining power of suppliers	How much pricing power do suppliers have?	Supplier concentration, switching costs
Threat of substitutes	Are there alternatives outside the industry?	Price-performance of substitutes, switching costs
Rivalry among existing competitors	How intense is competition within?	Number of firms, growth, fixed cost, exit barriers

flowchart LR
  E[Threat of New Entrants] --> R[Rivalry Among<br/>Existing Competitors]
  S[Threat of Substitutes] --> R
  B[Bargaining Power<br/>of Buyers] --> R
  SP[Bargaining Power<br/>of Suppliers] --> R
  style R fill:#FCE4EC,stroke:#AD1457
  style E fill:#E3F2FD,stroke:#1565C0
  style S fill:#FFF3E0,stroke:#EF6C00
  style B fill:#E8F5E9,stroke:#2E7D32
  style SP fill:#F3E8FD,stroke:#8430CE

A sixth force — complementors (Brandenburger & Nalebuff, 1996) — is sometimes added in modern usage. Industries with all five forces strong are unattractive; industries with one or two strong forces are typically attractive (porter1980?).

54.4.1 Industry Life Cycle

Four Stages of the Industry Life Cycle

Stage	Demand	Profitability	Strategic emphasis
Introduction	Slow growth	Low / negative	Build awareness, R&D
Growth	Rapid growth	Rising	Capture share
Maturity	Stable	Margins peak then fall	Cost efficiency, differentiation
Decline	Falling	Squeeze	Harvest or exit

54.4.2 Strategic Group Map

Within an industry, firms cluster into strategic groups — sets of firms following similar strategies on chosen dimensions (e.g., quality vs price; geographic spread vs niche). The strategic group map highlights who competes with whom most directly.

54.5 Internal Analysis — Value Chain

Porter’s Value Chain (1985) decomposes the firm into discrete activities that create value (porter1985?):

Porter’s Value Chain — Primary and Support Activities

Type	Activity	Example
Primary	Inbound logistics	Receiving raw material
Primary	Operations	Manufacturing
Primary	Outbound logistics	Distribution
Primary	Marketing & Sales	Advertising, sales force
Primary	Service	After-sales support
Support	Firm infrastructure	Finance, legal, planning
Support	Human Resource Management	Hiring, training
Support	Technology Development	R&D, IT systems
Support	Procurement	Sourcing inputs

Margin = (Total revenue − Total cost) — the value the firm captures. A firm earns superior returns by performing activities better or differently than its rivals.

54.6 Internal Analysis — RBV and VRIO

The Resource-Based View (Barney, 1991) — already met in topic 26 — argues that firms differ because of their resources and capabilities and that sustained advantage comes from resources passing the VRIO test (barney1991?):

Barney’s VRIO Framework

Letter	Test	If yes
V	Valuable	Resource exploits opportunity / neutralises threat → competitive parity
R	Rare	Few competitors hold it → temporary competitive advantage
I	Inimitable	Hard for competitors to copy → sustained competitive advantage
O	Organisationally exploitable	Firm is organised to exploit it → realised competitive advantage

54.6.1 Core Competence

Hamel and Prahalad’s core competence (1990) is the firm-level counterpart of an individual’s competency — “the collective learning in the organisation, especially how to coordinate diverse production skills and integrate streams of technology” (hamelprahalad1990?). Core competence has three properties:

Provides access to a wide variety of markets.
Makes a significant contribution to the customer benefits of the end product.
Difficult for competitors to imitate.

Examples: 3M’s adhesives, Honda’s small engines, Sony’s miniaturisation.

54.7 Capabilities, Dynamic Capabilities and Distinctive Competence

Three Related Concepts

Concept	Meaning
Capability	The capacity to perform a routine activity well
Dynamic capability	Ability to renew capabilities in response to changing environment (Teece)
Distinctive competence	Capability the firm performs better than rivals
Threshold capability	The minimum required to compete

David Teece’s dynamic capabilities (1997) emphasises sensing, seizing, and transforming — the firm’s ability to renew its resource base over time (teece1997?).

54.8 Practice Questions

Q 01 SWOT Easy

In SWOT analysis, "Threats" are:

AInternal weaknesses
BExternal harmful factors
CInternal harmful factors
DExternal helpful factors

View solution

Correct Option: B

Threats = external + harmful. Strengths = internal+helpful; weaknesses = internal+harmful; opportunities = external+helpful.

Q 02 PESTEL Easy

In PESTEL analysis, "S" stands for:

AStatistical
BStrategic
CSocial
DStakeholder

View solution

Correct Option: C

PESTEL = Political, Economic, Social, Technological, Environmental, Legal.

Q 03 Five Forces Medium

Porter's Five Forces framework includes which of the following?

ABargaining power of suppliers
BThreat of substitutes
CRivalry among existing firms
DAll of the above

View solution

Correct Option: D

Porter's five: Threat of new entrants, Bargaining power of suppliers, Bargaining power of buyers, Threat of substitutes, Rivalry among existing firms.

Q 04 Sixth Force Medium

A "sixth force" sometimes added to Porter's framework — by Brandenburger and Nalebuff — is:

ATrade unions
BComplementors
CGovernment
DGeography

View solution

Correct Option: B

Brandenburger & Nalebuff (1996) added complementors — firms whose products make yours more valuable.

Q 05 Value Chain Medium

In Porter's Value Chain, "Procurement" is classified as a:

APrimary activity
BSupport activity
CExternal activity
DStrategic activity

View solution

Correct Option: B

Procurement is one of the four support activities (with infrastructure, HRM, technology development). Primary activities are inbound, operations, outbound, marketing & sales, service.

Q 06 VRIO Medium

In Barney's VRIO framework, the "I" stands for:

AInimitable
BInternal
CIndustrial
DInfluential

View solution

Correct Option: A

VRIO = Valuable, Rare, Inimitable, Organisationally exploitable. Replaces the older VRIN.

Q 07 Core Competence Medium

"Core competence" — the collective learning that gives access to many markets, contributes to customer benefit, and is hard to imitate — is associated with:

APorter
BHamel and Prahalad
CMintzberg
DAndrews

View solution

Correct Option: B

Gary Hamel and C.K. Prahalad's 1990 HBR article "The Core Competence of the Corporation".

Q 08 Dynamic Capabilities Medium

The "dynamic capabilities" framework — sensing, seizing, transforming — is associated with:

AJay Barney
BDavid Teece
CMichael Porter
DHenry Mintzberg

View solution

Correct Option: B

David Teece's 1997 paper. Dynamic capabilities are about renewing resources in changing environments — sense, seize, transform.

Quick recall

Strategic analysis = external (industry, macro) + internal (resources, capabilities). Output: SWOT.
SWOT (Andrews, Humphrey-SOFT): internal vs external × helpful vs harmful. TOWS matrix → SO/WO/ST/WT strategies.
Macro: PESTEL (Political/Economic/Social/Technological/Environmental/Legal).
Industry: Porter’s Five Forces (1980): entrants · suppliers · buyers · substitutes · rivalry. Sixth force (Brandenburger & Nalebuff): complementors.
Industry life cycle: introduction → growth → maturity → decline. Strategic groups within an industry.
Internal: Value Chain (Porter 1985) — five primary + four support activities.
RBV (Barney 1991): VRIO test. Core competence (Hamel & Prahalad 1990) — three properties.
Dynamic capabilities (Teece 1997): sense, seize, transform.