Strategic Analysis: External and Internal Factors
External Analysis
External analysis begins by distinguishing between the generic environment (determined by the social and economic system in which the organization operates) and the specific environment (referring to the industrial sector made up of competitors, suppliers, and customers) that is closer to the organization. In a SWOT analysis, external analysis reveals the threats and opportunities that the organization faces.
Analysis of the General Environment
The global generic environment of a company refers to all those external factors that can influence its outcome. For this analysis, we use the PEST analysis, which considers four types of variables:
- Political-legal variables: Administrative factors, norms, and laws affecting the development of the company’s activity.
- Economic variables: Economic indicators that track the evolution of the economy and how it can affect the company’s activity.
- Socio-cultural variables: The values, beliefs, and attitudes of the community to which the company directs its efforts.
- Technological variables: The scientific and technological framework that surrounds the company. This is very important in managing innovation and avoiding product obsolescence.
Analysis of the Industrial Sector (Specific)
The industrial sector is made up of all companies engaged in the same economic activity, producing similar products or using similar production processes.
Competitive Forces in an Industry
Suppliers, potential competitors, customers, and substitutes.
Current Competition
Current competition aims to analyze the degree of rivalry among existing competitors in the sector. A high level of competition between firms will result in lower prices for consumers and increased costs to compete for business. The degree of rivalry among existing competitors depends critically on market structure and the typology of the sector.
Threat of New Entrants
The threat of new entrants is a function of entry barriers hindering access to the sector. These barriers can be of different types: cost advantages of incumbent firms, product differentiation, economies of scale, high capital requirements, and access to distribution channels.
Threat of Substitutes
The threat of substitutes determines the extent to which other products may meet the same needs of the buyer.
Internal Analysis
Internal Analysis places special emphasis on the study of financial, physical, human, technological, and commercial capabilities. The organization should use the value chain, which refers to the breakdown of the basic activities that are needed by the company to sell its product. Porter proposes a method that distinguishes between primary activities and support activities.
Strategic Analysis and Strategy Formulation
Strategic analysis allows company managers to study and monitor the strategic challenge and understand the intensity of external and internal factors that characterize it. Strategy formulation is the identification and evaluation of strategic alternatives, culminating with the selection of one of them. The strategic plan often includes a detailed study of the activities of the organization, highlighting where the company comes from, its current situation, and where it wants to go in the future.