55  Strategic Analysis — External and Internal

55.1 What is Strategic Analysis?

Strategic Analysis is the systematic study of an organisation’s environment, capabilities and position to inform strategic choices. It bridges environmental scanning (Step 1 of the strategic-management process) and strategy formulation. Kenneth Andrews, The Concept of Corporate Strategy (1971), gave the first integrated framework via SWOT.

flowchart TB
  SA[Strategic Analysis]
  SA --> EX[External Analysis]
  SA --> IN[Internal Analysis]
  EX --> ME[Macro Environment<br/>PESTEL]
  EX --> IE[Industry Environment<br/>Porter 5 Forces]
  EX --> CO[Competitor Analysis]
  IN --> RES[Resources & Capabilities<br/>VRIO/RBV]
  IN --> VC[Value Chain<br/>Porter]
  IN --> COMP[Core Competence<br/>Hamel-Prahalad]
  SA --> SW[SWOT / TOWS]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

55.2 External Environment

The external environment has two layers:

TipTwo layers of external environment
Layer Components Tool
Macro / Remote / General Broad forces affecting all firms PESTEL / PEST
Industry / Task / Competitive Forces specific to the industry Porter’s 5 Forces

55.3 PESTEL Analysis

PESTEL — originally PEST (Francis Aguilar, 1967, Scanning the Business Environment) — analyses macro-environmental forces. Modern PESTEL adds Environmental and Legal dimensions.

TipPESTEL framework
Letter Stands for Examples
P Political Government policies, regulations, political stability, tax laws
E Economic GDP, inflation, interest rates, exchange rates, employment
S Social / Sociocultural Demographics, culture, lifestyle, education
T Technological AI, automation, R&D, digital infrastructure
E Environmental / Ecological Climate change, sustainability, regulations
L Legal Labour law, competition law, IP, consumer protection

55.3.1 Variants

TipPEST variants
  • PEST — original.
  • PESTLE / PESTEL — adds Environmental + Legal.
  • STEEPLE — adds Ethical.
  • STEEPLED — adds Demographic.
  • DESTEP — Dutch variant.

55.4 Industry Analysis — Porter’s Five Forces (1979)

Michael E. Porter, Harvard Business Review (March 1979), and Competitive Strategy (1980) — five forces shape industry profitability:

flowchart TB
  C[Industry<br/>Rivalry]
  C --> NE[Threat of<br/>New Entrants]
  C --> SU[Bargaining Power<br/>of Suppliers]
  C --> BU[Bargaining Power<br/>of Buyers]
  C --> SS[Threat of<br/>Substitutes]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

TipPorter’s Five Forces
Force Determinants
Industry Rivalry No. of competitors, growth rate, fixed costs, differentiation, exit barriers
Threat of New Entrants Entry barriers — capital, economies of scale, brand, switching costs, distribution, regulation
Bargaining Power of Suppliers Concentration, switching costs, importance of input, forward-integration threat
Bargaining Power of Buyers Concentration, volume, price-sensitivity, switching costs, backward-integration threat
Threat of Substitutes Price-performance trade-off of substitutes, switching costs
NoteSixth Force — Complementors / Government

Brandenburger & Nalebuff (1996) added complementors as a sixth force (e.g., software for hardware). Some texts also add government / regulation as a sixth force.

55.4.1 Limitations of Porter’s 5 Forces

TipCriticisms
  • Static; assumes stable industries.
  • Underweights non-market factors (regulation, technology disruption).
  • Doesn’t capture ecosystem / platform dynamics.
  • Ignores collaboration / co-opetition.
  • Hard to define industry boundary in convergent industries.
  • Limited applicability to digital platforms.

55.5 Industry Life Cycle

TipFour stages of industry life cycle
Stage Sales growth Strategic implications
Introduction / Emerging Slow High R&D, market education
Growth Fast Capacity expansion, market share
Maturity / Shake-out Slowing Cost focus, differentiation, consolidation
Decline Falling Harvest, divest, niche, retreat

55.6 Strategic Group Analysis

Michael Hunt (1972) + Porter — firms within an industry can be grouped by similar strategies. Examples in Indian banking: PSU banks · private-sector banks · foreign banks · new-age (Bandhan, IDFC First) · payments banks · small-finance banks.

55.7 Competitor Analysis

TipPorter’s framework for competitor analysis
  • Future Goals — what drives the competitor?
  • Current Strategy — what is the competitor doing?
  • Assumptions — about themselves and industry.
  • Capabilities — strengths & weaknesses.

55.8 Internal Analysis — Resources and Capabilities

55.8.1 Resource-Based View (RBV)

Birger Wernerfelt (SMJ, 1984) and Jay Barney (JoM, 1991) — strategy from internal resources and capabilities.

TipTypes of resources
  • Tangible — financial, physical, technology, organisational.
  • Intangible — human, innovation, brand, reputation.
  • Capabilities — what the firm can do with its resources.
  • Competence — integrated capability for specific tasks.
  • Core competence — Hamel-Prahalad (1990).
  • Distinctive capability — Kay (1993) — sustainable advantage source.

55.8.2 VRIN / VRIO Framework — Barney (1991, 1995)

A resource yields sustained competitive advantage if it is:

TipBarney’s VRIN / VRIO
Test Question
Valuable Does it enable the firm to exploit opportunities / neutralise threats?
Rare Is it possessed by few competitors?
Inimitable Is it costly to imitate?
Non-substitutable / Organised Are there no strategic equivalents? / Is the firm organised to exploit it?

55.8.3 Sources of Inimitability

TipWhy resources are hard to imitate
  • Unique historical conditions (path-dependence).
  • Causal ambiguity — not clear why it works.
  • Social complexity — culture, networks.
  • Patents and IP protection.

55.9 Value Chain Analysis — Porter (1985)

Michael Porter, Competitive Advantage (1985) — disaggregates a firm into discrete activities to identify sources of advantage.

flowchart TB
  S[Support Activities]
  P[Primary Activities]
  S --> FI[Firm Infrastructure]
  S --> HR[Human Resource Management]
  S --> TD[Technology Development]
  S --> PR[Procurement]
  P --> IL[Inbound Logistics]
  P --> OP[Operations]
  P --> OL[Outbound Logistics]
  P --> MS[Marketing & Sales]
  P --> SV[Service]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

TipPorter’s Value Chain — activities

Primary Activities (margin-generating):

  • Inbound Logistics — receiving, storing, distributing inputs.
  • Operations — converting inputs to outputs.
  • Outbound Logistics — order processing, distribution.
  • Marketing & Sales — advertising, pricing.
  • Service — installation, repair, customer care.

Support Activities (cross-functional):

  • Firm Infrastructure — general management, finance, planning.
  • Human Resource Management.
  • Technology Development — R&D, process engineering.
  • Procurement — purchasing.

55.9.1 Value System

The value chain doesn’t exist in isolation — it sits in a value system of suppliers’ chains, the firm’s chain, channel chains, and buyers’ chains.

55.9.2 Service Value Chain — Heskett

James Heskett et al. — The Service Profit Chain (1997) — for service firms, links employee satisfaction → service quality → customer satisfaction → loyalty → profitability.

55.10 Core Competence — Hamel & Prahalad (1990)

C.K. Prahalad and Gary Hamel (HBR May-June 1990) — “The Core Competence of the Corporation” — strategic advantage is rooted in core competencies — bundles of skills and technologies that enable a firm to provide a particular benefit to customers.

TipThree tests of a core competence
  • Provides access to wide variety of markets.
  • Makes a significant contribution to perceived customer benefits.
  • Difficult for competitors to imitate.

Iconic examples: Honda (small engines) · Sony (miniaturisation) · Canon (optics + microelectronics) · 3M (adhesives + thin-film coating).

55.11 Critical Success Factors (CSF)

John F. Rockart, MIT Sloan (1979) — CSFs = the few key areas where things must go right for the business to succeed. CSFs vary by industry, position, time and environment.

55.12 Distinctive Capabilities — John Kay (1993)

John Kay (LBS) identified three sources of distinctive capability:

TipKay’s three distinctive capabilities
  • Architecture — network of internal/external relationships.
  • Reputation — most commercially valuable distinctive capability.
  • Innovation — sustainable when defended.

A fourth — Strategic Assets — also recognised (control of scarce resources).

55.13 Benchmarking

TipTypes of benchmarking
  • Internal benchmarking — across units of same firm.
  • Competitive benchmarking — vs direct competitors.
  • Functional benchmarking — best-in-function across industries.
  • Generic benchmarking — universal processes.
  • Strategic benchmarking — long-term comparison.
  • Performance benchmarking — KPIs.
  • Process benchmarking — workflows.
  • Robert Camp (Xerox 1989) — pioneered modern benchmarking.

55.14 SWOT / TOWS Analysis

SWOT = Strengths · Weaknesses · Opportunities · Threats — synthesised by Kenneth Andrews (Harvard) and the Albert Humphrey at Stanford (1960s SRI Research Project on Long-Range Planning). The most-taught strategy tool worldwide.

TipSWOT 2 × 2
Helpful Harmful
Internal Strengths Weaknesses
External Opportunities Threats

55.14.1 TOWS Matrix — Weihrich (1982)

Heinz Weihrich — extended SWOT into the TOWS matrix for strategy generation:

TipTOWS strategic combinations
Strengths (S) Weaknesses (W)
Opportunities (O) SO: Maxi-Maxi (use strengths to exploit opportunities) WO: Mini-Maxi (overcome weaknesses to exploit opportunities)
Threats (T) ST: Maxi-Mini (use strengths to avoid threats) WT: Mini-Mini (minimise weaknesses and avoid threats)

55.15 ETOP and SAP

TipETOP and SAP — Indian usage
  • ETOP (Environmental Threat and Opportunity Profile) — popularised in Indian strategy texts; rates environmental factors as opportunity / threat.
  • SAP (Strategic Advantage Profile) — identifies internal strengths/weaknesses across functions; Indian textbook tool.

55.16 QUEST and Scenario Planning

TipAdvanced environment analysis tools
  • QUEST (Quick Environmental Scanning Technique) — Burton Nanus.
  • Scenario Planning — Royal Dutch Shell (Pierre Wack 1970s); multiple plausible futures.
  • Cross-Impact Analysis.
  • Delphi Method — expert iterative forecasting.
  • Trend extrapolation.
  • Wargames and simulations.

55.17 Industry and Country Analysis

TipMacro analyses
  • Porter’s Diamond Model (1990) — national competitive advantage; factor conditions, demand conditions, related industries, firm strategy and rivalry, government, chance.
  • CAGE Distance Framework — Pankaj Ghemawat — Cultural · Administrative · Geographic · Economic distance.
  • Country Risk Indices — Euromoney, ICRG, OECD.

55.18 Indian Examples

TipFamous Indian strategy cases for analysis
  • Reliance Industries — vertical integration; refining → retail → telecom (Jio).
  • Tata Group — conglomerate with related diversification; Tata Steel-Corus; Tata Motors-JLR.
  • Hindustan Unilever (HUL) — distribution depth (Shakti); rural penetration.
  • Maruti Suzuki — cost leadership in small cars.
  • ITC — related diversification — tobacco → hotels → FMCG → agribusiness.
  • Infosys / TCS — services-export model; offshoring core competency.

55.20 Practice Questions

Q 01 Five Forces Easy

Porter's Five Forces framework was published in 1979 in:

  • AMcKinsey Quarterly
  • BHarvard Business Review
  • CSloan Management Review
  • DCalifornia Management Review
View solution
Correct Option: B
HBR March 1979; expanded in *Competitive Strategy* (1980).
Q 02 PESTEL Easy

In PESTEL, the second "E" stands for:

  • AEthical
  • BEnvironmental
  • CEconomic
  • DEducation
View solution
Correct Option: B
P-E-S-T-Environmental-L. First E = Economic.
Q 03 VRIN Medium

In Barney's VRIN, the "I" stands for:

  • AImaginative
  • BInimitable
  • CIndispensable
  • DInflated
View solution
Correct Option: B
Valuable · Rare · Inimitable · Non-substitutable.
Q 04 Value Chain Medium

Porter's Value Chain was developed in:

  • A1980
  • B1985
  • C1990
  • D1996
View solution
Correct Option: B
*Competitive Advantage* (1985); 5 primary + 4 support activities.
Q 05 Core competence Medium

"Core Competence of the Corporation" (1990) was by:

  • AHamel & Prahalad
  • BPorter
  • CBarney
  • DMintzberg
View solution
Correct Option: A
**Gary Hamel and C.K. Prahalad**, HBR (1990).
Q 06 SWOT Easy

In SWOT analysis, "Opportunities" are:

  • AInternal helpful factors
  • BExternal helpful factors
  • CInternal harmful factors
  • DExternal harmful factors
View solution
Correct Option: B
Opportunities = external + helpful.
Q 07 TOWS Medium

The TOWS Matrix extension (1982) was developed by:

  • AHeinz Weihrich
  • BAlbert Humphrey
  • CKenneth Andrews
  • DIgor Ansoff
View solution
Correct Option: A
**Heinz Weihrich** (1982) — TOWS for strategy generation.
Q 08 PEST origin Hard

PEST analysis was originated in 1967 by:

  • AFrancis Aguilar
  • BIgor Ansoff
  • CMichael Porter
  • DHenry Mintzberg
View solution
Correct Option: A
Francis Aguilar, *Scanning the Business Environment* (1967).
Q 09 Sixth Force Hard

The "Sixth Force" (Complementors) added to Porter's framework is by:

  • ABrandenburger & Nalebuff
  • BHamel & Prahalad
  • CPorter himself
  • DKim & Mauborgne
View solution
Correct Option: A
Brandenburger & Nalebuff (1996) — **Co-opetition**.
Q 10 Value chain primary Medium

Which is NOT a primary activity in Porter's Value Chain?

  • AInbound Logistics
  • BOperations
  • CTechnology Development
  • DOutbound Logistics
View solution
Correct Option: C
**Technology Development** is a *support* activity, not primary.
Q 11 Industry life cycle Medium

Industry life-cycle stages, in order:

  • AGrowth → Introduction → Maturity → Decline
  • BIntroduction → Growth → Maturity → Decline
  • CIntroduction → Maturity → Growth → Decline
  • DMaturity → Growth → Introduction → Decline
View solution
Correct Option: B
Introduction → Growth → Maturity → Decline.
Q 12 CSF Hard

The "Critical Success Factors" concept (1979) was developed by:

  • AJohn F. Rockart
  • BMichael Porter
  • CPeter Drucker
  • DRobert Kaplan
View solution
Correct Option: A
John F. Rockart, MIT Sloan (1979).
Q 13 CAGE Hard

CAGE Distance Framework was proposed by:

  • APankaj Ghemawat
  • BHofstede
  • CPorter
  • DGhoshal
View solution
Correct Option: A
Pankaj Ghemawat — Cultural, Administrative, Geographic, Economic distance.
Q 14 Diamond Hard

Porter's Diamond Model (1990) describes:

  • ACompetitive forces in an industry
  • BNational competitive advantage
  • CValue chain
  • DGeneric strategies
View solution
Correct Option: B
National competitive advantage; from *The Competitive Advantage of Nations* (1990).
Q 15 Benchmarking Medium

Modern benchmarking was pioneered at:

  • AXerox
  • BIBM
  • CApple
  • DToyota
View solution
Correct Option: A
Robert Camp at Xerox (1989) — pioneered modern benchmarking.
Q 16 Distinctive cap Hard

John Kay's "Distinctive Capabilities" do NOT include:

  • AArchitecture
  • BReputation
  • CInnovation
  • DBargaining power
View solution
Correct Option: D
Architecture · Reputation · Innovation (+ Strategic Assets). Bargaining power isn't a Kay capability.
Q 17 Scenario planning Medium

Scenario planning as a strategic technique is most associated with:

  • ARoyal Dutch Shell (Pierre Wack)
  • BBoston Consulting Group
  • CMcKinsey
  • DBain
View solution
Correct Option: A
Pierre Wack at Shell, 1970s.
Q 18 Strategic groups Hard

The concept of "Strategic Groups" was introduced by:

  • AMichael Hunt (1972)
  • BHenry Mintzberg
  • CJay Barney
  • DIgor Ansoff
View solution
Correct Option: A
Michael Hunt (1972 PhD thesis) → popularised by Porter.
Q 19 SWOT origin Hard

SWOT analysis emerged from work at:

  • AStanford Research Institute (Albert Humphrey)
  • BMcKinsey
  • CHarvard Business School
  • DLondon Business School
View solution
Correct Option: A
Stanford Research Institute (SRI) in 1960s, Albert Humphrey; Andrews integrated.
Q 20 Match concepts Hard

Match the framework with its author:

(i) 5 Forces (a) Hamel & Prahalad
(ii) Value Chain (b) Barney
(iii) VRIN (c) Porter
(iv) Core Competence (d) Porter (1985)
  • A(i)-(c), (ii)-(d), (iii)-(b), (iv)-(a)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(d), (ii)-(a), (iii)-(c), (iv)-(b)
  • D(i)-(b), (ii)-(c), (iii)-(d), (iv)-(a)
View solution
Correct Option: A
5 Forces — Porter; Value Chain — Porter (1985); VRIN — Barney; Core Competence — Hamel & Prahalad.

55.20.1 Advanced Format Questions

AR 1Assertion-ReasonHard

A: Porter's 5 Forces analyses industry attractiveness.
R: Industry rivalry, supplier power, buyer power, threat of new entrants and substitutes shape profitability.

  • ABoth true; R explains A
  • BBoth true; R does not explain A
  • CA true, R false
  • DA false, R true
View solution
Correct Option: A
S 1Statement-basedMedium

External tools: (i) PESTEL. (ii) Porter 5F. (iii) ETOP. (iv) SAP.

  • A(i), (ii), (iii) only — SAP is internal
  • BAll four
  • C(iv) only
  • D(i) and (iv) only
View solution
Correct Option: A
SAP = Strategic Advantage Profile (internal).
S 2Statement-basedHard

Internal-analysis tools: (i) Value chain. (ii) VRIO/VRIN. (iii) Core competence. (iv) Resource audit.

  • AAll four
  • B(i) and (ii) only
  • C(iii) and (iv) only
  • D(i), (ii), (iii) only
View solution
Correct Option: A

55.21 Quick Recall

ImportantQuick recall
  • Strategic Analysis = External + Internal + SWOT integration.
  • External layers: Macro (PESTEL) + Industry (5 Forces) + Competitor.
  • PESTEL — Aguilar (1967 PEST): Political · Economic · Social · Technological · Environmental · Legal. Variants: STEEPLE · STEEPLED · DESTEP.
  • Porter’s Five Forces (1979): Rivalry · New Entrants · Suppliers · Buyers · Substitutes.
  • Sixth Force — Brandenburger-Nalebuff (1996): Complementors / Co-opetition.
  • Industry Life Cycle: Introduction · Growth · Maturity · Decline.
  • Strategic Groups — Michael Hunt (1972); popularised by Porter.
  • Competitor Analysis: Future Goals · Current Strategy · Assumptions · Capabilities.
  • RBV — Wernerfelt (1984), Barney (1991) — internal sources of advantage.
  • Resources: Tangible · Intangible · Capabilities · Competence · Core competence · Distinctive.
  • VRIN / VRIO — Barney: Valuable · Rare · Inimitable · Non-substitutable / Organised.
  • Sources of inimitability: historical, causal ambiguity, social complexity, IP.
  • Value Chain — Porter (1985): 5 Primary (Inbound · Operations · Outbound · M&S · Service) + 4 Support (Firm Infra · HRM · Technology · Procurement).
  • Service-Profit Chain — Heskett (1997).
  • Core Competence — Hamel & Prahalad (HBR 1990): 3 tests — market access, customer benefit, hard to imitate. Honda, Sony, Canon, 3M.
  • CSFs — Rockart (1979, MIT Sloan).
  • Distinctive Capabilities — John Kay (1993): Architecture · Reputation · Innovation (+ Strategic Assets).
  • Benchmarking — Robert Camp / Xerox (1989): Internal · Competitive · Functional · Generic · Strategic · Performance · Process.
  • SWOT — Andrews / SRI Humphrey (1960s): Internal-Helpful (S), Internal-Harmful (W), External-Helpful (O), External-Harmful (T).
  • TOWS — Weihrich (1982): SO Maxi-Maxi, ST Maxi-Mini, WO Mini-Maxi, WT Mini-Mini.
  • Indian textbook tools: ETOP · SAP.
  • Scenario Planning — Pierre Wack / Shell (1970s); QUEST · Delphi · Cross-Impact · Wargames.
  • Country analysis: Porter’s Diamond (1990); CAGE Distance — Ghemawat.
  • Indian examples: Reliance · Tata · HUL · Maruti · ITC · Infosys/TCS.
  • Modern trends: big-data competitor intel · AI/ML · real-time PESTEL · geopolitical · ESG materiality · platform/ecosystem analysis · VUCA/BANI scenario planning · OSINT.