Chapter 9 – Strategic Management Part 2 – Strategic Analysis and the Business Environment

 

Chapter 9 – Strategic Management

Part 2 – Strategic Analysis and the Business Environment

By Mary Lourdes Bonnici

Introduction

Strategic analysis is one of the most important stages of strategic management. Before an organisation can decide where it wants to go, it must first understand where it currently stands and what is happening around it.

Managers therefore need to examine the organisation's internal strengths and weaknesses, the external environment, competitors, market developments, available resources and emerging opportunities or threats.

A strong strategic analysis provides the evidence required for better decision-making and helps organisations develop strategies that are realistic, competitive and sustainable.

1. Understanding the Business Environment

The business environment consists of all the internal and external factors that can influence an organisation's activities, decisions, performance and future direction.

Organisations do not operate in isolation. Their success may be affected by customers, employees, competitors, suppliers, government policies, economic conditions, technological developments and wider social changes.

Understanding the business environment allows managers to recognise changes early and prepare appropriate strategic responses.

The business environment can generally be divided into two major areas:

Internal Environment – factors within the organisation that management can influence or control.

External Environment – factors outside the organisation that may influence organisational performance but are generally outside management's direct control.

A continuous understanding of both environments enables organisations to remain adaptable and competitive.

2. Internal and External Environmental Analysis

Internal Environmental Analysis

Internal environmental analysis examines the organisation itself.

Management evaluates areas such as:

• Human resources

• Financial resources

• Organisational structure

• Leadership

• Corporate culture

• Technology

• Operational processes

• Knowledge and expertise

• Brand reputation

• Physical resources

• Organisational capabilities

The purpose is to identify areas where the organisation performs strongly and areas that may require improvement.

For example, an organisation may possess highly skilled employees and an excellent reputation but may have outdated information systems. Management would therefore need to protect its strengths while addressing its weaknesses.

External Environmental Analysis

External environmental analysis examines factors occurring outside the organisation.

These may include:

• Economic developments

• Political decisions

• Government regulation

• Technological change

• Social and demographic trends

• Environmental concerns

• Competitors

• Customers

• Suppliers

• Industry developments

• Changes in consumer behaviour

External analysis helps management identify possible opportunities and threats.

Because the external environment changes continuously, environmental analysis should not be treated as a one-time exercise. It should form part of ongoing strategic management.

3. SWOT Analysis

One of the most widely used strategic analysis tools is SWOT Analysis.

SWOT stands for:

S – Strengths
W – Weaknesses
O – Opportunities
T – Threats

Strengths and weaknesses normally relate to the organisation's internal environment, while opportunities and threats normally arise from the external environment.

Strengths

Strengths are internal characteristics that provide an organisation with an advantage.

Examples may include:

• Strong brand reputation

• Skilled employees

• Financial stability

• Efficient operations

• Strong customer loyalty

• Advanced technology

• Experienced leadership

Weaknesses

Weaknesses are internal limitations that may reduce organisational effectiveness.

Examples include:

• Limited financial resources

• Outdated technology

• Poor communication

• Skills shortages

• High operating costs

• Weak brand recognition

• Inefficient processes

Opportunities

Opportunities are favourable external developments that an organisation may be able to exploit.

Examples include:

• Emerging markets

• New technologies

• Changing customer preferences

• Strategic partnerships

• New distribution channels

• Reduced competition

• International expansion

Threats

Threats are external developments that may negatively affect organisational performance.

Examples include:

• Increasing competition

• Economic downturns

• Regulatory changes

• Technological disruption

• Changing customer expectations

• Rising costs

• Supply-chain disruptions

A SWOT analysis becomes most useful when managers use the findings to develop actual strategic actions rather than simply producing a list.

4. PESTLE Analysis

PESTLE Analysis examines the wider external environment affecting an organisation.

PESTLE stands for:

Political
Economic
Social
Technological
Legal
Environmental

Political Factors

Political factors include government decisions and political developments that may influence organisations.

Examples include:

• Government stability

• Tax policies

• Trade policies

• Public expenditure

• Employment policies

• International relations

Economic Factors

Economic conditions influence consumer spending, investment and organisational costs.

Examples include:

• Inflation

• Interest rates

• Economic growth

• Unemployment

• Exchange rates

• Consumer purchasing power

Social Factors

Social factors reflect changes in society, demographics and consumer attitudes.

Examples include:

• Population trends

• Age distribution

• Education

• Lifestyle changes

• Cultural attitudes

• Consumer expectations

Technological Factors

Technological developments can create opportunities while also disrupting existing business models.

Examples include:

• Artificial intelligence

• Automation

• Digital platforms

• Cybersecurity

• Data analytics

• E-commerce

• New production technologies

Legal Factors

Organisations must operate within applicable laws and regulations.

Examples include:

• Employment legislation

• Data protection

• Consumer protection

• Competition law

• Health and safety legislation

• Intellectual property law

Environmental Factors

Environmental considerations are becoming increasingly important in strategic management.

Examples include:

• Climate change

• Waste management

• Energy consumption

• Sustainable sourcing

• Environmental regulation

• Corporate sustainability expectations

PESTLE analysis helps organisations anticipate major external developments before they significantly affect operations.

5. Porter's Five Forces Model

Porter's Five Forces Model, developed by Michael Porter, is used to analyse the competitive forces within an industry.

The five forces are:

1. Competitive Rivalry

This considers the intensity of competition between existing organisations within the industry.

Competition tends to be stronger where:

• Many competitors operate in the market

• Products are similar

• Market growth is limited

• Customers can easily switch suppliers

Strong rivalry may place pressure on prices, profitability and market share.

2. Threat of New Entrants

New competitors may enter an industry and challenge existing organisations.

The threat is influenced by barriers to entry such as:

• Capital requirements

• Regulations

• Brand loyalty

• Economies of scale

• Specialist knowledge

• Access to distribution

Higher barriers to entry generally reduce the threat from new competitors.

3. Bargaining Power of Suppliers

Suppliers may influence prices, quality and availability of important resources.

Supplier power tends to increase when:

• Few suppliers exist

• Resources are specialised

• Switching suppliers is expensive

• The organisation depends heavily on a particular supplier

4. Bargaining Power of Buyers

Customers may have significant bargaining power when they have many alternatives available.

Customers may demand:

• Lower prices

• Higher quality

• Better service

• Greater product choice

Organisations therefore need to understand customer expectations and switching behaviour.

5. Threat of Substitute Products or Services

Substitutes are alternative products or services that satisfy the same customer need.

For example, technological innovation may create an entirely different way of delivering a service previously provided through traditional methods.

A high threat of substitutes can place pressure on prices and encourage organisations to innovate.

6. Competitor Analysis

Competitor analysis involves evaluating organisations that compete for the same customers, resources or market position.

Managers may examine:

• Competitors' products and services

• Pricing strategies

• Market share

• Strengths and weaknesses

• Marketing strategies

• Distribution channels

• Customer reputation

• Technology

• Innovation

• Future strategic direction

Competitor analysis enables management to understand how competitors may react to changes within the market.

However, the objective should not simply be to imitate competitors. Effective strategy involves developing a distinctive position that provides value to customers.

7. Industry and Market Analysis

Industry analysis examines the broader sector in which an organisation operates.

Management may investigate:

• Market size

• Industry growth

• Customer demand

• Profitability

• Market trends

• Competitor concentration

• Technological development

• Regulation

• Entry barriers

• Customer behaviour

Market analysis focuses more specifically on customers and demand.

Managers may analyse:

• Customer segments

• Customer needs

• Purchasing patterns

• Demographic characteristics

• Market growth

• Demand trends

• Emerging consumer preferences

Combining industry and market analysis provides managers with a clearer understanding of where opportunities may exist.

8. Resources, Capabilities and Core Competencies

Organisations differ considerably in the resources and capabilities available to them.

Resources

Resources are the assets available to an organisation.

They may include:

Tangible resources, such as:

• Buildings

• Equipment

• Financial capital

• Technology

• Inventory

Intangible resources, such as:

• Brand reputation

• Knowledge

• Intellectual property

• Organisational culture

• Customer relationships

• Employee expertise

Capabilities

Capabilities refer to an organisation's ability to use its resources effectively.

For example, two organisations may possess similar technology, but one may achieve better results because its workforce has stronger technical expertise and better operating processes.

Core Competencies

Core competencies are distinctive organisational capabilities that contribute significantly to competitive advantage.

A strong core competency should ideally:

• Create value for customers

• Be difficult for competitors to imitate

• Support multiple products or markets

• Contribute to long-term organisational success

Understanding core competencies allows organisations to concentrate resources on areas where they possess genuine strategic strength.

9. Value Chain Analysis

Value Chain Analysis, also associated with Michael Porter, examines the activities through which an organisation creates value for customers.

The value chain is generally divided into primary activities and support activities.

Primary Activities

Primary activities are directly involved in producing, delivering and supporting products or services.

They include:

Inbound Logistics – receiving and managing inputs.

Operations – transforming inputs into products or services.

Outbound Logistics – distributing products or delivering services.

Marketing and Sales – promoting and selling products or services.

Service – supporting customers after purchase or delivery.

Support Activities

Support activities help primary activities operate effectively.

They include:

Procurement – acquiring necessary resources.

Technology Development – improving products, processes and systems.

Human Resource Management – recruiting, developing and managing employees.

Firm Infrastructure – activities such as finance, planning, legal services and management.

Value chain analysis helps managers identify where value is created, where costs arise and where improvements may provide competitive advantage.

10. Identifying Strategic Opportunities and Threats

The ultimate purpose of strategic analysis is to convert information into strategic insight.

Managers must determine which environmental developments may represent opportunities and which may represent threats.

Strategic Opportunities

Opportunities may arise through:

• New markets

• Technological innovation

• Changing customer needs

• Strategic partnerships

• New products or services

• International expansion

• Competitor weaknesses

• Regulatory developments

• Digital transformation

However, not every opportunity should be pursued.

Management must consider whether the organisation has sufficient resources, capabilities and strategic alignment to exploit the opportunity successfully.

Strategic Threats

Threats may include:

• New competitors

• Economic instability

• Rising operating costs

• New regulations

• Cybersecurity risks

• Technology disruption

• Changing customer behaviour

• Supply-chain problems

• Declining market demand

Strong organisations identify threats early and develop appropriate contingency plans.

Integrating Strategic Analysis

Strategic analysis tools should not normally be used independently.

A more comprehensive analysis combines several approaches.

For example:

PESTLE Analysis examines the wider macro-environment.

Porter's Five Forces evaluates competitive pressures within the industry.

Competitor Analysis examines individual competitors.

SWOT Analysis combines internal and external findings.

Value Chain Analysis examines how organisational activities create value.

Resources and Capabilities Analysis identifies the organisation's internal strategic strengths.

Together, these tools provide management with a comprehensive understanding of the organisation's strategic position.

Practical Example

Imagine a company considering expansion into a new digital market.

Management may begin with PESTLE Analysis to examine technological, economic, social and regulatory developments.

It may then use Porter's Five Forces to determine the level of industry competition.

A competitor analysis can identify major rivals and their market positions.

Management can then assess whether the company possesses the necessary technology, workforce skills, financial resources and organisational capabilities.

Finally, a SWOT analysis may combine these findings to determine whether expansion represents a realistic strategic opportunity.

The decision is therefore based on systematic evidence rather than assumption.

Key Management Principle

Effective strategic management requires managers to understand both the organisation and the environment in which it operates.

Internal strengths alone cannot guarantee success if external threats are ignored.

Similarly, attractive market opportunities may provide little value if the organisation lacks the resources and capabilities required to exploit them.

Strategic analysis therefore creates the foundation for informed strategic decision-making.

Reflection Questions

1. Why is environmental analysis important before developing organisational strategy?

2. What is the difference between internal and external environmental analysis?

3. How can SWOT analysis support strategic decision-making?

4. What does PESTLE analysis reveal about the wider business environment?

5. How can Porter's Five Forces help managers evaluate industry attractiveness?

6. Why is competitor analysis important even for successful organisations?

7. What is the difference between organisational resources and capabilities?

8. How can core competencies contribute to competitive advantage?

9. How does value chain analysis help an organisation improve performance?

10. How can managers distinguish between a genuine strategic opportunity and an attractive idea that does not fit the organisation?

From my Perspective

Reflection Answers

Chapter 9 – Strategic Management

Part 2 – Strategic Analysis and the Business Environment

1. Why is environmental analysis important before developing organisational strategy?

From my perspective, environmental analysis is essential because an organisation should not develop strategy without first understanding the conditions in which it operates. I believe managers need to assess both internal and external factors before making important decisions. This helps identify strengths that can be developed, weaknesses that need attention, opportunities that may support growth and threats that could negatively affect performance. A strategy based on evidence is more reliable than one based only on assumptions.

2. What is the difference between internal and external environmental analysis?

I see internal environmental analysis as an examination of factors within the organisation, such as employees, leadership, financial resources, systems, organisational culture and operational capabilities. External environmental analysis focuses on factors outside the organisation, including economic conditions, competitors, legislation, technology, customer expectations and market developments. In my view, managers must understand both because internal strengths must be aligned with external opportunities and challenges.

3. How can SWOT analysis support strategic decision-making?

I believe SWOT analysis is particularly useful because it provides a clear and structured overview of an organisation's strategic position. It allows management to identify strengths and weaknesses internally while also considering opportunities and threats externally. From my perspective, the real value of SWOT analysis comes when managers use the findings to develop specific actions rather than treating it simply as an exercise. It can help determine where investment is needed, which opportunities should be pursued and which risks require attention.

4. What does PESTLE analysis reveal about the wider business environment?

PESTLE analysis helps me understand the wider forces that may influence an organisation even when management has little or no direct control over them. Political decisions, economic changes, social expectations, technological developments, legal requirements and environmental concerns can all affect organisational performance. I believe that regularly reviewing these factors enables managers to anticipate change and prepare appropriate strategic responses rather than reacting only after problems arise.

5. How can Porter's Five Forces help managers evaluate industry attractiveness?

From my perspective, Porter's Five Forces provides managers with a clearer understanding of the level of competition within an industry. By analysing competitive rivalry, new entrants, supplier power, buyer power and substitute products or services, management can determine how difficult it may be to operate successfully within a particular market. I believe this model is valuable because it encourages managers to look beyond direct competitors and consider the wider competitive pressures affecting profitability and long-term sustainability.

6. Why is competitor analysis important even for successful organisations?

I believe successful organisations must continue analysing competitors because success today does not guarantee success tomorrow. Competitors may introduce new technologies, improve customer service, reduce prices or develop innovative products. From my perspective, managers should continuously observe market developments so that they are not taken by surprise. Competitor analysis also helps organisations identify gaps in the market and opportunities to differentiate themselves rather than simply copying others.

7. What is the difference between organisational resources and capabilities?

I understand resources as the assets available to an organisation, while capabilities refer to how effectively those resources are used. An organisation may possess excellent technology, financial resources and skilled employees, but these resources will not automatically create strong performance unless they are managed effectively. From my perspective, organisational capability is often what transforms available resources into meaningful results.

8. How can core competencies contribute to competitive advantage?

Core competencies can provide an organisation with competitive advantage when they represent something the organisation performs particularly well and which competitors find difficult to replicate. I believe areas such as specialised knowledge, strong leadership, customer relationships, innovation or operational excellence can become valuable core competencies. When these strengths are developed and protected, they can help the organisation differentiate itself and create greater value for customers.

9. How does value chain analysis help an organisation improve performance?

From my perspective, value chain analysis helps managers examine every major activity involved in creating and delivering value. By analysing areas such as operations, logistics, marketing, human resources, technology and procurement, management can identify inefficiencies, unnecessary costs and opportunities for improvement. I believe this approach is valuable because sometimes small improvements across several activities can significantly strengthen overall organisational performance.

10. How can managers distinguish between a genuine strategic opportunity and an attractive idea that does not fit the organisation?

I believe managers should evaluate an opportunity carefully before committing resources. An opportunity may appear attractive, but it should also align with the organisation's objectives, capabilities, financial resources, expertise and long-term strategy. From my perspective, managers need to ask whether the organisation has the ability to pursue the opportunity successfully and whether it creates genuine value. Strategic decisions should therefore be based on analysis, feasibility and organisational alignment rather than enthusiasm alone.

Personal Reflection

From my perspective, strategic analysis is fundamentally about making informed decisions. Effective managers should understand what is happening inside their organisation while also remaining aware of developments outside it. I strongly believe that successful strategy requires continuous observation, critical thinking and the ability to adapt.

Tools such as SWOT, PESTLE, Porter's Five Forces and Value Chain Analysis are valuable because they transform information into structured strategic insight. However, the tools themselves do not make decisions. Management judgement, experience and leadership remain essential in interpreting the findings and deciding the most appropriate direction for the organisation.

Ultimately, I believe that strategic analysis allows managers to move from simply reacting to circumstances towards anticipating change, recognising opportunities and preparing the organisation for future challenges.

Conclusion

Strategic analysis enables organisations to understand their competitive position before major strategic decisions are made. By examining internal resources and capabilities alongside external economic, political, technological, social and competitive developments, managers gain a more complete picture of the organisation's operating environment.

Tools such as SWOT Analysis, PESTLE Analysis, Porter's Five Forces, competitor analysis and value chain analysis provide structured methods for evaluating strategic conditions.

The most effective organisations do not simply react to changes after they occur. They continuously analyse their environment, recognise emerging opportunities, anticipate potential threats and use their resources and core competencies to create sustainable competitive advantage.

Mary Lourdes Bonnici MBA

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