STRATEGIC ANALYSIS

(INTERNAL AND EXTERNAL

ANALYSIS)
1

5TH LECTURE
 CHAPTER OUTLINES
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External Analysis
Internal Analysis
Evaluating Internal and External Analysis
 DEFINITIONS
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 External analysis involves evaluation of the broad and task

environments to determine trends, threats and opportunities
and to provide a foundation for strategic direction.
 Also called:
 Environmental scanning
 Industry analysis
 Focuses on identifying and evaluating trends and events
beyond the control of a single firm, such as increased foreign
competition, an aging society, information technology, and
the computer revolution.
 Reveals key opportunities and threats confronting an
organization so that managers can formulate strategies to take
advantage of the opportunities and avoid or reduce the impact
of threats
 THE IMPORTANCE OF EXTERNAL STRATEGIC ANALSIS
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 To identify strategic opportunities and threats in the

organization’s operating environment that will affect how it
pursues its mission.
 Help organization to have an assessment of the competitive
structure of the organization’s industry including competitive
position of the specific organization and its major rivals.
 Help organization to assess the impact of globalization on
competition within industry, country, region and continents.
 Help organization to determine how macroeconomics, social,
government, legal, international, and technological factors
have an impacts towards organization.
 EXTERNAL ANALYSIS
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 The purpose of an external audit is to develop a finite list of

opportunities that could benefit a firm and avoid threats.
 External forces (Key External Forces) can be divided into five
broad categories:
a) Economic forces;
b) Social, cultural, demographic, and environmental forces;
c) Political, governmental, and legal forces;
d) Technological forces; and
e) Competitive forces.
 External trends and events significantly affect all products,
services, markets, and organizations in the world
 Changes in external forces translate into changes in consumer
demand for both industrial and consumer products and
services
EXTERNAL ANALYSIS: KEY EXTERNAL FORCES
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Economic forces
 Economic factors have a direct impact on the potential
attractiveness of various strategies.
 For example, as interest rates rise, then funds needed for
capital expansion become more costly or unavailable.
 Variables: Inflation rates, government budget deficits,
Unemployment trends etc.
EXTERNAL ANALYSIS: KEY EXTERNAL FORCES
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Social, cultural, demographic, and environmental forces

 Have a major impact upon virtually all products, services, markets,
and customers.
 Small, large, for-profit, and nonprofit organizations in all industries
are being staggered and challenged by the opportunities and threats
arising from these changes.
 Analysis:
 Population growing older
 Increase in younger population
 Gap between rich and poor widening etc.
 Variables: Number of births, number of deaths, Social security
programs, life expectancy rates, trust in government, Government
regulation, social responsibility etc.
EXTERNAL ANALYSIS: KEY EXTERNAL FORCES
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Political, governmental, and legal forces

 Economic factors have a direct impact on the potential
attractiveness of various strategies.
 For example, as interest rates rise, then funds needed for
capital expansion become more costly or unavailable.
 Variables: Inflation rates, government budget deficits,
Unemployment trends, general elections etc.
EXTERNAL ANALYSIS: KEY EXTERNAL FORCES
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Technological forces
 Represent major opportunities and threats that must be
considered in formulating strategies.
 Technological advancements can create new competitive
advantages that are more powerful than existing advantages.
 Not all sectors of the economy are affected equally by
technological developments.
 Example: The communications, electronics, aeronautics, and
pharmaceutical industries are much more volatile than the
textile, forestry, and metals industries.
 Cell phone and wireless Internet access are becoming common.
EXTERNAL ANALYSIS: KEY EXTERNAL FORCES
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Competitive forces
 Collection and evaluation of information on competitors is essential
for successful strategy formulation.
 Collecting and evaluating information on competitors is essential for
successful strategy formulation.
 Identifying major competitors is not always easy because many firms
have divisions that compete in different industries.
 Most multidivisional firms generally do not provide sales and profit
information on a divisional basis for competitive reasons.
 Also, privately held firms do not publish any financial or marketing
information.
 An important part of an external audit is identifying rival firms and
determining their strengths, weaknesses, capabilities, opportunities,
threats, objectives, and strategies. (Refer Figure 2.2 Porter’s Five-
forces Model)
 Tools for external analysis
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PESTEL
Competitor
Market changes
Michael Porter’s “Five Forces Model”
 PEST
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PEST or PESTEL analysis represents all the major

external forces (political, economic, social,
technological, environmental and legal) affecting the
company so it’s the best place to look for the existing
or new opportunities and threats.
 Competitor
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Competitor’s react to your moves and external

changes. They also change their existing strategies or
introduce new ones. Therefore, the company must
always follow the actions of its competitors as new
opportunities and threats may open at any time.
 Market changes
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The most visible opportunities and threats appear during the
market changes.
Markets converge, starting to satisfy other market segment
needs with the same product.
New geographical markets open up allowing the firm to
increase its export volumes or start operations in a new
country.
Often niche markets become profitable due to technological
changes.
As a result, changes in the market create new opportunities
and threats that must be seized upon or dealt with if the
company wants to gain and sustain competitive advantage.
 Michael Porter’s “Five Forces Model”
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Threat of New Entrants

Bargaining Power of Suppliers
Industry Rivalry
Bargaining Power of Buyers
Threat of Substitute Products
Porter’s five forces model is an analysis tool that uses
five industry forces to determine the intensity of
competition in an industry and its profitability level
These forces determine an industry structure and the
level of competition in that industry.
The stronger competitive forces in the industry are
the less profitable it is.
An industry with low barriers to enter, having few
buyers and suppliers but many substitute products
and competitors will be seen as very competitive and
thus, not so attractive due to its low profitability.
 Threat of new entrants

. This force determines how easy (or not) it is to

enter a particular industry.
If an industry is profitable and there are few
barriers to enter, rivalry soon intensifies.
When more organizations compete for the same
market share, profits start to fall.
It is essential for existing organizations to create
high barriers to enter to deter new entrants.
 Threat of new entry ( info should be collected)

Amount of capital required

Retaliation by existing companies
Legal barriers (patents, copyrights, etc.)
Brand reputation
Product differentiation
Access to suppliers and distributors
Economies of scale
Sunk costs
Government regulation
 Bargaining power of suppliers

Strong bargaining power allows suppliers to sell

higher priced or low quality raw materials to their
buyers.
This directly affects the buying firms’ profits because
it has to pay more for materials.
 Bargaining power of suppliers

Number of suppliers
Suppliers’ size
Ability to find substitute materials
Materials scarcity
Cost of switching to alternative materials
Threat of integrating forward
 Buyer power

Buyers have the power to demand lower price or

higher product quality from industry producers
when their bargaining power is strong.
Lower price means lower revenues for the producer,
while higher quality products usually raise
production costs.
Both scenarios result in lower profits for producers
 Buyer power

Number of buyers
Size of buyers
Size of each order
Buyers’ cost of switching suppliers
There are many substitutes
Price sensitivity
Threat of integrating backward
 Threat of substitutes

This force is especially threatening when buyers can

easily find substitute products with attractive prices
or better quality and when buyers can switch from
one product or service to another with little cost
 For example, to switch from coffee to tea doesn’t
cost anything, unlike switching from car to bicycle
 Threat of substitutes

Number of substitutes
Performance of substitutes
Cost of changing
 Rivalry among existing competitors

This force is the major determinant on how

competitive and profitable an industry is.
In competitive industry, firms have to compete
aggressively for a market share, which results in low
profits
 Rivalry among existing competitors

Number of competitors
Cost of leaving an industry
Industry growth rate and size
Product differentiation
Competitors’ size
Customer loyalty
Threat of horizontal integration
Level of advertising expense
Exp porter
 EXTERNAL ANALYSIS:
The Process of Performing an External Audit
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1) The process of performing an external audit must involve as

many managers and employees as possible.
2) To perform an external audit, a company first must gather
competitive intelligence and information.
1) Individuals can be asked to monitor various sources of
information such as key magazines, trade journals, and
newspapers.
2) The Internet is another source for gathering strategic
information, as are corporate, university, and public
libraries.
3) Suppliers, distributors, salespersons, customers, and
competitors represent other sources of vital information.
 EXTERNAL ANALYSIS:
The Process of Performing an External Audit
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3) Once information is gathered, it should be

assimilated, evaluated, and prioritized.
4) Key external factors should be important to
achieving long term and annual objectives,
measurable, applicable to all competing firms, and
hierarchical in the sense that some will pertain to
the overall company while others will be more
narrowly focused.
 EXTERNAL ANALYSIS:
INDUSTRIAL ORGANIZATIONAL VIEW
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Industrial Organization view is an approach that

belief the Industry or known as external factors more
important than internal factors.
Some of the elements under I/O view such as the
following:
 Performance determined by industry forces
 Focus on analyzing external forces and industry variables as a
basis to gain and keep competitive advantage.
 Competitive advantage is determined by competitive
positioning within industry.
 Each factor is essential for the organization to take into
consideration for formulating strategies
 EXTERNAL ANALYSIS
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Opportunities
 A condition in the general environment that, if exploited, helps a
company achieves strategic competitiveness.

 Opportunities are also conditions in the external environment that

allow a firm to take advantage of organizational strengths, overcome
organizational weaknesses and neutralize environmental threats.

Threats/Challenges
 A condition in the general environment that may hinder a
company’s efforts to achieve strategic competitiveness.

 It is also known as a condition in the external environments that

may stand in the way of organizational competitiveness or the
achievement of stakeholder satisfaction
EXTERNAL ANALYSIS
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 EXTERNAL ANALYSIS:
SOURCES OF INFORMATION
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Information is available from Both Published and

Unpublished Sources
 Unpublished sources: customer survey, market research,
speeches of professional, shareholders’ meeting, interview
conversation, television programs
 Published sources: periodicals journals, reports, government
documents, abstracts, books, directories
Internets
 35

INTERNAL ANALYSIS
 DEFINITIONS
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internal analysis, it includes a broader evaluation of

all of the organization’s resources and capabilities, to
determine strengths, weaknesses and opportunities
for competitive advantage and to identify
organizational vulnerabilities that should be
corrected.
 Areas for internal analysis
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Resources: land, equipment, knowledge, brand

equity, intellectual property, etc.
Core competencies
Capabilities
Functional areas: management, operations,
marketing, finances, human resources and R&D
Organizational culture
Value chain activities
THE IMPORTANCE OF INTERNAL STRATEGIC ANALYSIS
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It serves to pinpoint the strengths and weaknesses of

the organization such as resources, capabilities,
distinctive competencies and competitive advantage.
Help organization to achieve superior efficiency,
quality, innovation and responsiveness to its
customers.
By knowing the strengths, it can lead to superior
performance in many aspects whereas by knowing
organization weaknesses, it can improve the
performance from inferior to superior performance
 INTERNAL ANALYSIS
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All organizations have strengths and weaknesses in

the functional areas of business.
No enterprise is equally strong or weak in all areas.
Internal strengths/weaknesses, coupled with
external opportunities/threats and a clear
statement of mission, provide the basis for
establishing objectives and strategies.
 INTERNAL ANALYSIS
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Key Internal Forces (Distinctive competencies )

 A firms strengths that cannot be easily matched or imitated by
competitors are called distinctive competencies.
 Building competitive advantages involves taking advantage of
distinctive competencies
 Strategies are designed in part to improve on a firms
weaknesses, turning them into strengths, and maybe even into
distinctive competencies.
 INTERNAL ANALYSIS:
The Process of Performing an Internal Audit
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 The process of performing an internal audit closely parallels the

process of performing an external audit.
1) Representative managers and employees from throughout the
firm need to be involved in determining a firms strengths and
weaknesses.
2) Performing an internal audit requires gathering, assimilating,
and evaluating information about the firms operations.
3) Compared to the external audit, the process of performing an
internal audit provides more opportunity for participants to
understand how their jobs, departments, and divisions fit into
the whole organization.
4) Financial ratio analysis exemplifies the complexity of
relationships among the functional areas of business.
 STEPS IN PERFORMING INTERNAL ANALYSIS
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Step 1: Gather competitive intelligence &

information.
Step 2: Assimilate and evaluate the information.
Step 3: Series of meeting to identify the most S&W
factors facing by organization.
Step 4: List out the key factors.
Step 5: Prioritize the list by have it ranked from the
most important to the least important.
Step 6: Communicated and distributed “a final list”
widely in the organization.
 INTERNAL ANALYSIS:
RESOURCE BASED VIEW (RBV)
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The RBV approach to competitive advantage

contends that internal resources are more important
than external factors for a firm in achieving and
sustaining competitive advantage.
Resources are the sources of firm’s capabilities,
broad in scope and cover a spectrum of individual,
social and organizational phenomena.
Its also a firm’s assets.
 INTERNAL ANALYSIS:
RESOURCE BASED VIEW (RBV)
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Internal factors can be grouped into 3 categories:

a) Physical resources (plant, equipment, location,
technology, raw materials, machines, etc.
b)Human resources (employees, training, experience,
intelligence, knowledge, skills, abilities, etc.
c) Organizational resources (firm structure, planning
processes, information systems, patents, trademarks,
copyrights, databases, etc.
 ORGANIZATIONAL TANGIBLE RESOURCES
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 Financial Resources
 Funds allocated
 The organization’s ability to generate internal funds

 Organizational Resources
 The firm’s formal reporting structure and its formal planning,
controlling and coordinating systems
 Physical Resources
 Sophistication and location of a firm’s plant and equipment

 Access to raw materials

 Technological Resources
 Stock of technology, such as patents, trademarks, copyrights, and
trade secrets
 ORGANIZATIONAL INTANGIBLE RESOURCES
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 Human Resources
 Knowledge
 Trust
 Managerial capabilities
 Organizational routines
 Innovation Resources
 Ideas, Scientific capabilities, Capacity to innovate
 Reputational Resources
 Reputation with customers: Brand name, perceptions of product
quality, durability, and reliability.
 Reputation with suppliers: For efficient, effective, supportive, and
mutually beneficial interactions and relationships.
COMPONENTS OF INTERNAL ANALYSIS LEADING TO COMPETITIVE
ADVANTAGE AND STRATEGIC COMPETITIVENESS
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Value chain analysis in private
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49
 Value chain analysis (VCA)
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a process where a firm identifies its primary and support activities that
add value to its final product and then analyze these activities to
reduce costs or increase differentiation.

Value chain represents the internal activities a firm engages in

when transforming inputs into outputs.

goal is to recognize, which activities are the most valuable

 public value chain is analyzed in three
dimensions:
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1. Employee satisfaction and commitment;

2. Citizen/client service satisfaction;
3. Citizen trust and confidence in public institutions

It serves to link two of the key priorities for public sector reform – service
improvement and human resource modernization – priorities that are usually
addressed in isolation, despite the fact that success in one depends on
success in the other (Heintzman and Marson, 2003).
 Value chain analysis in government
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Public value analysis
 Financial – impacts on current or anticipated
income, asset values, liabilities, entitlements, and
other aspects of wealth or risks to any of the
above
 Political – impacts on personal or corporate
influence on government actions or policy, role
in political affairs, or influence in political parties
or prospects for current or future public office
 Social – impacts on family or community
relationships, social mobility, status, and
identity.
 Strategic – impacts on economic or political
advantage or opportunities, goals, and resources
for innovation or planning
 Ideological – impacts on beliefs, moral or ethical
commitments, alignment of government actions
or policies or social outcomes with beliefs, or
moral or ethical positions
 Stewardship – impacts on the public’s view of
government officials as faithful stewards or
guardians of the value of the government itself in
terms of public trust, integrity, and legitimacy
Stakeholder analysis
 Involving multiple participants with
wide knowledge of the stakeholder
environment
 Looking widely to identify all
relevant stakeholders through
brainstorming and related methods
to stimulate divergent thinking and
include multiple opinions and
information sources
 Identifying multiple stakeholder
roles, internal and external to the
organization setting
 Identifying stakeholder expectations,
influence potential, past and future
participation possibilities, and level
of interest
INTEGRATING STRATEGY AND CULTURE
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Organizational culture – a pattern of behavior that

has been developed by an organization as it learns to
cope with its problem of external adaptation and
internal integration, and that has worked well
enough to be considered valid and to be taught to
new members as the correct way to perceive, think
and feel.
 RESOURCES AS THE FIRM’S CAPABILITIES
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Capabilities represent the capacity to deploy

resources which lies in the firm’s employees
(competitive advantages and functional expertise)
Functional expertise as follows:
a) Management
b)Marketing
c) Finance/accounting
d)Production/operations
e) Research and development
f) Management information systems etc.
The links among resources, capabilities, and competitive
advantage
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MANAGEMENT
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 MARKETING
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Marketing can be described as the process of defining, anticipating,

creating, and fulfilling customers needs and wants for products and
services
 FINANCE
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The functions of finance/accounting comprise three decisions: the

investment decision, the financing decision, and the dividend decision.
 RESEARCH AND DEVELOPMENT
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Organization jointly explore; assess and decide the

what, when, where, why and how much of R&D
Priorities, cost, benefits and rewards associated with
R&D are discussed openly and shared
Internal R&D – an organization operates its own
R&D activities
Contract R&D – independent researchers @
independent agencies
 MANAGEMENT INFORMATION SYSTEM
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Collects, codes, stores, synthesizes and present

information in such a manner that it answers
important operating and strategic questions
 SWOT tool has 5 key benefits
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Simple to do and practical to use;

Clear to understand;
Focuses on the key internal and external factors
affecting the company;
Helps to identify future goals;
Initiates further analysis.
 Flaws of SWOT
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Excessive lists of strengths, weaknesses,

opportunities and threats;
No prioritization of factors;
Factors are described too broadly;
Factors are often opinions not facts;
No recognized method to distinguish between
strengths and weaknesses, opportunities and threats.
INTERNAL ANALYSIS
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EXTERNAL ANALYSIS
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