Department of Management

College of Business and Economics

Addis Ababa University

Strategic Management
Short Note

Yohannes Neda
yohannesneda@gmail.com

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 Chapter Three
External Environmental
Analysis
Chapter Objectives Contents

At the end of this chapter students will be able to: ➢ The nature of external audit
➢ Describe the nature of external audit ➢ The Process of Performing an External Audit
➢ Explain sources of external information ➢ Analysis of key external factors
➢ Perform external audit ✓ Generalexternal factors
✓ Industry analysis
✓ Competitors analysis

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Outcomes From External & Internal The Nature of External Analysis

Environmental Analyses  The purpose of an external audit is to develop a finite list of
opportunities that could benefit a firm and threats that should be
avoided.
 The external audit is not aimed at developing an exhaustive list
By Studying the External By Studying the of every possible factor that could influence the business; rather,
Environment, firms Internal Environment, it is aimed at identifying key variables that offer actionable
identify: firms identify: responses.
 Firms should be able to respond either offensively or defensively
• What they might choose to to the factors by formulating strategies that take advantage of
do? • What they can do? external opportunities or that minimize the impact of potential
threats.
 The process of performing an external audit must involve as
many managers and employees as possible.

Examine resources, External Analysis Components

Examine capabilities &
opportunities & competencies The external
threats environmental
analysis consists
of:

 The
 Before an organization can begin strategy formulation, it general/macro
must scan the external environment to identify possible environment
opportunities and threats and its internal environment  The industry
for strengths and weaknesses.
environment
 Environmental Analysis involves the monitoring,
evaluation, and dissemination of information from  The competitor
the external and internal environments to key people analysis
within the corporation.

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The General/Macro/-Environment (PESTEL– Analysis)

 The general/macro environment in strategic management refers to
the broad external factors that can influence an organization's
performance and strategic decisions.
 The macro-environment is the highest-level layer.
 It consists of broad environmental factors that impact to a greater
or lesser extent on almost all organizations.
 Analysis of the general environment is focused on its future
impacts on firm’s performance.
 In this respect, the awareness & understanding of an increasingly
turbulent, complex & global general environment is critical.
 The general environment influences the firm’s strategic options &
the decisions made in light of this.
 Here, the PESTEL framework can be used to identify how future
trends in the political, economic, social, technological,
environmental (‘Ecological’) and legal environments might impinge
on organizations.
 PESTEL analysis provides the broad ‘data’ from which to identify
key drivers of change.
 PESTEL analysis helps organizations identify opportunities and
threats in the external environment, enabling them to adapt their
strategies accordingly.
 Politics highlights the role of governments; Economics refers to
macro-economic factors such as exchange rates, business cycles
and differential economic growth rates around the world; Social
influences include changing cultures and demographics;
Technological influences refer to innovations such as the Internet,
Artificial Intelligence, nanotechnology or the rise of new composite
materials; Environmental stands specifically for ‘green’ issues,
such as pollution and waste; and finally Legal embraces legislative
constraints or changes, such as health and safety legislation or
restrictions on company mergers and acquisitions.
 The factors in the PESTEL analysis framework are closely related
and a change one of the factors could affect other factors.

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The Political Environment Some key Political Variables

 In all economies the government has played an important role in  Tax laws
promoting modern economic development, in some being an  Environmental protection laws
extremely active participant. The strategy of government is an  Level of government subsidies
important part of the strategic context for other players.  Antitrust legislation
 The nature of the political system affects the probability of policy  Terrorist activities
change. Some degree of political stability is a precondition for  Import/Export regulations
successful business activity. It is difficult to conduct successful  Fiscal & monetary policies
business either with a hostile government or in conditions of  Size of Government budget
unpredictable political change.  Local, state & national elections
 Other political actions aimed at protecting employees, customers,
the general public, and the environment.
 There are also political actions that are designed to benefit and
protect organizations: patent laws, government subsidies, and
The Economic Environment
product research grants.
 Macroeconomic forces affect the general health and well-
Political action can bring about substantial impact on three being of a nation or the regional economy of an organization,
governmental functions that influence the external environment which in turn affect companies’ and industries’ abilities to
of firms: earn an adequate rate of return
 It emphasizes on issues related to the distribution, supply,
 Supplier function: government decision regarding the accessibility
and availability of money, such as the performance of
of private businesses to government-owned natural resources and
national economies and changes in currency exchange rates.
stockpiles of agricultural products will profoundly affect the viability
of the strategies of the firms.
 Customer function: government demand for products and services Economic assessment must address:
can create, sustain, enhance, or eliminate many market  The overall economic forecast and the likely funding stream
opportunities. that will be available.
 Competitive function: the government can operate as an almost  The international and national forces that can affect the
unbeatable competitor in the market place. Thus, knowing of economic well being of the organization should be analyzed.
government’s strategies can help a firm avoid unfavorable
confrontation with the government as a competitor.

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Some key Economic Variables Some key Social Variables

 Changing work values
 Level of disposable income  Ethical standards
 Growth rate of the economy  Growth rate of population
 Interest rates  Life expectancies
 Currency exchange rates  Rate of family formation
 Interest rates  Consumer activism
 Inflation/deflation rates  Geographic shifts in population
 Unemployment trends  Attitudes towards business
 Consumption patterns  Average level of education
 Stock market trends  Attitudes towards leisure time
 Import/Export factors  Number of marriages
 Demand shifts  Number of divorces
 Price fluctuations
 Fiscal policies The Technological Environment
 Tax rates
 Availability of credit  Technological change creates both opportunity, as firms begin to explore how
to use technology to create new products and services, and threats, as
The Social Environment 
technological change forces firms to rethink their technological strategies.
Over the last few decades, the pace of technological change has accelerated.
 This has unleashed a process that has been called a “perennial gale of
creative destruction.”
 Social forces refer to the way in which changing social  Technological change can make established products obsolete overnight and
morals and values affect an industry. simultaneously create a host of new product possibilities.
 Like the other macro environmental forces discussed here,  Thus, technological change is both creative and destructive—both an
social change creates opportunities and threats. opportunity and a threat.
 Dynamic social forces can influence the demand for an  Organizations must strive to understand the existing scientific or
organization’s products or services, and such forces should technological advances:
modify the organization’s strategic decision making. ✓ To avoid obsolescence and promote innovation, the organization must
 These factors include the beliefs, values, attitudes, opinions, be conscious of technological changes that could affect its operation
and life style of persons depending up on cultural, ✓ It should understand that new technologies might require new operation
demographic, religious, and ethnic conditioning. systems and bring about sudden and dramatic effect on an
organization’s environment.
✓ Intelligible technological adaptations can suggest possibilities for new
products, improvements in existing products, or in manufacturing and
marketing techniques
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Some key Technological variables The Legal Environment

 Identified new research initiatives  Legal factors are closely related to the political factors discussed
 New patents and products above and they are and usually they are the results of political
 Speed of change and adoption of new technology actions.
 Level of expenditure on R&D by organization's rivals  Legal factors include current and impending legislation that may
 Developments in nominally unrelated affect the industry in areas such as employment, competition, and
 industries that might be applicable health and safety.
 Analysis on the legal environment should consider the impact of a
country’s national laws as well as those originating in other
The Natural Environment countries that could affect a business.

Some key Legal Variables

 The issues surrounding environmental protection have
become increasingly important in recent years.
 This has become more significant with globalization as the
impact of an organization’s actions may be felt outside of its  Competition law and government policy
native country and may incur unquantifiable financial  Employment and safety law
penalties.  Product safety issues
 Consumer laws
Some key Natural Environmental  Tax laws
 Environmental protection laws
Variables  Antitrust legislation



Pollution control
Waste management
Using the PESTEL Framework
 Air pollution
 Water pollution
 Apply selectively and identify factors which impact the industry,
 Energy conservation
market and organisation in question.
 Natural resources available
 Identify factors which are important currently but also consider
 Energy costs and their growth rate
factors which will become more important in the next few years.
 Climate factors
 Use up to date information to support the points and analyse trends.
 The requirements of the
 Identify opportunities and threats – the main point of the exercise!

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The Industry Environment

 An industry is a group of firms producing products that are close

substitutes.
 Firms that influence one another
 Includes a rich mix of competitive strategies that companies use in
pursuing strategic competitiveness & earning above-average
returns.
 Analysis of the industry environment is focused on the factors &
conditions influencing the firm’s profitability in the industry.
 Compared to the general environment, the industry environment
has a more direct effect on the firm’s strategic competitiveness &
capability of earning above-average returns
 Porter’s Five-Forces Model of competitive analysis is a widely used
approach for developing strategies in many industries. The intensity
of competition among firms varies widely across industries.
 Based on Porter’s model, the nature and degree of competition in
an industry hinge on five forces:

1.The threat of new entrants  When using this framework to understand competitive forces it is
2.The bargaining power of suppliers essential to bear the following in mind:
 It must be used at the level of strategic business and not at
3.The bargaining power of buyers the level of the whole organization. This is because
4.The threat from substitute products organizations are diverse in their operations and markets.
 Understanding the connections between competitive forces
5.Rivalry (competition) among existing firms
and the key drivers in the macro-environment is essential.
 The five forces are not independent of each other. Pressures
from one direction can trigger off changes in another in a
dynamic process of shifting sources of competition.
 Competitive behavior may be concerned with disrupting these
forces and not simply accommodating them.

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How Competitive Forces Shape Strategy 1. Threat of Entry

 The essence of strategy formulation is coping with competition.  Potential competitors are companies that are not currently
 Competition exists in the fight for market share. competing in an industry but have the capability to do so if
 Therefore, competition in an industry is rooted in its underlying they choose.
economics, and competitive forces.  New entrants come into a market place when the profit margins
 In light of this, customers, suppliers, potential entrants, and are attractive and the barriers to entry are low.
substitute products are all competitors that may be more or less  Threat of entry will depend on the extent to which there are
prominent or active depending on the industry type. barriers to entry.
 Thus, the collective strength of these forces determines the  These are factors that need to be overcome by new entrants if
ultimate profit potential of an industry. they are to compete successfully.
 Within Porter’s framework, a strong competitive force can be  These should be seen as providing delays to entry and not as
regarded as a threat because it depresses profits. permanent barriers to determined potential entrants.
 A weak competitive force can be viewed as an opportunity because  They may deter some potential entrants but not others.
it allows a company to earn greater profits.  Typical barriers are as follows:
 The strength of the five forces may change over time as industry
conditions change.
✓ Economies of scale
 The task facing managers is to recognize how changes in the five
forces give rise to new opportunities and threats and to formulate ✓ Product differentiation
appropriate strategic responses.
 In addition, it is possible for a company, through its choice of ✓ Capital requirements
strategy, to alter the strength of one or more of the five forces to ✓ Cost disadvantages
its advantage.
 Thus, to cope with them the strategist must delve below the ✓ Access to distribution channels
surface and analyze the sources of competition. For example: ✓ Government policy
 What makes the industry vulnerable to entry?
 What determines the bargaining power of suppliers? ✓ Expected Retaliation:
 Knowledge of these underlying sources of competitive pressure
provides the groundwork for a strategic plan of action to:
 Highlight the critical strengths and weaknesses of the company
 Animate the positioning of the company in its industry
 Clarify the areas where strategic changes may yield the
greatest payoff
 Highlight the industry trends as either opportunities or threats

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Economies of scale Cost disadvantages independent of scale

 Economies of scale arise when unit costs fall as a firm expands  Entrenched companies may have cost advantages not available to
its output. potential rivals, no matter what their size and economies of scale.
 Economies of scale deter entry by forcing the aspirant either to  These advantages can stem from the effects of:
come in on large scale or accept a cost disadvantage.  the learning curve, and proprietary technology,
 Sources of economies of scale include: cost reductions gained  access to the best raw material sources,
through mass-producing a standardized output; discounts on  assets purchased at pre-inflation prices,
bulk purchases of raw material inputs and component parts;  government subsidies, favorable location, and
 official rights (patents)
the advantages gained by spreading fixed production costs over
a large production volume; and the cost savings associated with Access to distribution channels:
spreading marketing and advertising costs over a large volume
of output.
 Affects new entrants since the new product must displace others via price
Product differentiation: breaks, promotions, and intense selling efforts.
 When there are limited wholesale or retail channels and the existing
competitors occupied them, entry into the industry will be tougher.
 Brand identification creates a barrier by forcing entrants to
spend heavily to overcome customer loyalty.
 Factors fostering brand identification are being first in the Government Policy
industry, advertising, customer service, and product
differences.
 Product differentiation is perhaps the most important barrier in  The government can limit or even foreclose entry to industries with
soft drinks, cosmetics, and investment banking. such controls as license requirements and limits on access to raw
materials.
Capital requirements  The government also can play a major indirect role by effecting
entry barriers through controls such as air and water pollution
standards and safety regulations.
 The need to invest large financial resources in order to compete
creates a barrier to entry.
 Capital is necessary not only for fixed facilities but also for Expected Retaliation
customer credit, inventories, and absorbing start-up loses.
 The huge capital requirements in certain fields, such as
computer manufacturing and mineral extraction, limit other  Existing firms might respond in different ways when new comers inter in
entrants. to the market.
 Responses by existing competitors may depend on a firm’s present stake
in the industry and available business options.

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2. The Bargaining Power of Suppliers

 Suppliers are the organizations that provide inputs into the Individual buyers are not large customers of suppliers
industry, such as materials, services, and labor (which may be and there are many buyers
individuals, organizations such as labor unions, or companies that
supply contract labor). When buyers are small and fragmented, they have less influence
 The bargaining power of suppliers refers to the ability of suppliers over suppliers. Suppliers are less dependent on any single buyer,
which reduces the buyers’ ability to negotiate favorable terms. In
to raise input prices, or to raise the costs of the industry in other contrast, if a buyer is large and accounts for a significant portion of
ways, for example, by providing poor-quality inputs or poor the supplier’s revenue, the supplier is more likely to accommodate
service. their demands.
 Powerful suppliers squeeze profits out of an industry by raising the
costs of companies in the industry.
 Thus, powerful suppliers are a threat. Suppliers’ goods are critical to buyers’ marketplace
success
Supplier power increases when: If the suppliers’ products or services are essential to the buyers’
operations or success in the marketplace, the suppliers gain more
bargaining power. Buyers cannot afford to lose access to these
Suppliers are large and few in number critical inputs, making them more dependent on the suppliers.
When suppliers are large and few in number, they have more
control over the market. This is because buyers have limited Suppliers’ products create high switching costs
alternatives to choose from, making it difficult for them to negotiate
better terms. Suppliers can dictate prices, quality, and delivery High switching costs occur when it is expensive or time-consuming
schedules, giving them significant leverage. for buyers to switch from one supplier to another. This could be due
to specialized equipment, training, or contractual obligations. When
switching costs are high, buyers are less likely to change suppliers,
Suitable substitute products are not available increasing the suppliers’ bargaining power.
If there are no suitable substitutes for the suppliers’ products,
buyers are forced to rely on those suppliers. This lack of
alternatives strengthens the suppliers’ position, as buyers cannot Suppliers pose a threat to integrate forward into
easily switch to other products or suppliers. buyers’ industry
If suppliers have the capability or potential to enter the buyers’
industry (forward integration), they gain additional bargaining
power. Buyers may be forced to accept less favorable terms to
avoid the risk of suppliers becoming competitors.

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3. Bargaining Power of Buyers

 An industry’s buyers may be the individual customers who Buyers purchase a large portion of an industry’s total
ultimately consume its products (its end users) or the companies
that distribute an industry’s products to end users, such as
output
retailers and wholesalers. When buyers account for a large share of an industry’s total sales,
 The bargaining power of buyers refers to the ability of buyers to they gain significant bargaining power. Suppliers rely heavily on
bargain down prices charged by companies in the industry or to these buyers for their revenue, making them more willing to
raise the costs of companies in the industry by demanding better accommodate the buyers’ demands.
product quality and service.
 When buyers purchase from the industry standard or Buyers’ purchases are a significant portion of a
undifferentiated products, they are always sure that they can find supplier’s annual revenues
alternative suppliers & may play one company against another. If a buyer represents a large percentage of a supplier’s annual
revenue, the supplier is more likely to prioritize that buyer’s needs.
This dependency increases the buyer’s bargaining power, as the
Buyer power increases when: supplier cannot afford to lose such a significant customer.

Buyers can switch to another product without

Buyers are large and few in number incurring high switching costs
When buyers are large and few in number, they have more
influence over suppliers. Suppliers become dependent on these When buyers can easily switch to alternative products or suppliers
large buyers for a significant portion of their revenue, making it without facing significant costs or disruptions, their bargaining
difficult for suppliers to ignore their demands. This gives buyers the power increases. Suppliers must compete to retain these buyers,
leverage to negotiate better terms. often by offering better prices or terms.

Buyers pose threat to integrate backward into the

As an example, in Ethiopia, the government is the primary (or only) sellers’ industry
client for road construction projects. This situation significantly
increases the bargaining power of the buyer (the government) If buyers have the capability or potential to produce the product
because the government is a single, or dominant buyer with themselves (backward integration), they gain significant bargaining
substantial control over the market. Road construction companies power. Suppliers may be forced to offer better terms to prevent
have no alternative /or limited/ clients to turn to, making them buyers from entering their industry and becoming competitors.
heavily dependent on the government for contracts and revenue.

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4. Threat of Substitute Products

Buyers face few switching costs

 In Porter’s Five Forces model, the threat of substitute products refers
Switching costs refer to the time, money, or effort required for
to the likelihood that customers will switch to alternative products or customers to switch from one product to another. When switching
services that fulfill the same need. costs are low, customers can easily move to substitutes,
 Substitution reduces demand for a particular ‘class’ of products as increasing the threat.
customers switch to the alternatives – even to the extent that this
class of products or services becomes obsolete.
 This depends on whether a substitute provides a higher perceived Technological advancements
benefit or value.
 In many industries, firms are in close competition with producers of Technological innovations can create new substitutes that
substitute products in other industries. outperform existing products. Companies that fail to keep up with
technological changes risk losing customers to more advanced
alternatives.
The threat of substitute products increases
when:
Regulatory or environmental factors
Government regulations or environmental concerns can drive the
adoption of substitutes. For example, regulations promoting
The substitute product’s price is lower renewable energy increase the threat of substitutes for fossil
When substitute products are priced lower than the existing product, fuels.
customers are more likely to switch, especially if the lower price does
not come at the expense of quality or performance. Price-sensitive
customers are particularly influenced by this factor.

Substitute product’s quality and performance are equal to

or greater than the existing product
If substitutes offer comparable or superior quality and performance,
customers have little reason to stay loyal to the existing product. This is
especially true in industries where innovation or technology can quickly
level the playing field.

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5. Rivalry Among Competing Firms

 Competitive rivals are organizations with similar products and There are high fixed costs or high storage costs
services aimed at the same customer group.
Industries with high fixed costs (e.g., manufacturing plants,
 Rivalry among competing firms is usually the most powerful of the equipment) or high storage costs push firms to maximize capacity
five competitive forces. utilization to spread costs over more units. This often triggers price
 Industry rivalry often overshadows other forces (like the threat of wars as companies lower prices to sell excess inventory or keep
new entrants or bargaining power of buyers) because it reflects the production running.
day-to-day struggle for market dominance among established
players. There is a lack of differentiation opportunities or low
switching costs
 In Porter’s Five Forces model, industry rivalry refers to the intensity
of competition among existing firms in an industry. High industry When products or services are undifferentiated, competition shifts
rivalry can lead to price wars, increased marketing costs, and to price, as customers see little reason to prefer one firm over
another. Also, low switching costs—where customers can easily
reduced profitability. move to a competitor without incurring a cost or with low cost—
further intensify rivalry, as firms must constantly fight to retain
customers.
Industry rivalry increases when:
When the strategic stakes are high
There are numerous or equally balanced competitors Rivalry escalates when the industry or market is critical to a firm’s
overall success, such as a core business unit or a high-growth
When an industry has many players of similar size and capability, no region. Companies are willing to invest heavily or take risks to
single firm can dominate, leading to a fragmented market where protect their position.
everyone fights for a share. This creates a “war of all against all”
scenario. Alternatively, when competitors are equally balanced (e.g.,
similar market share, resources, or brand strength), they are more
likely to challenge each other aggressively to gain an edge. When high exit barriers prevent competitors from
leaving the industry
Exit barriers—such as specialized assets (e.g., factories), emotional
Industry growth slows or declines attachment, or contractual obligations—trap firms in an industry
even when profits are low or negative. These “stuck” competitors
In a slow-growth or shrinking market, firms can no longer rely on an keep fighting, often irrationally, worsening rivalry.
expanding customer base to increase revenue. Instead, they must
steal market share from rivals, heightening competition.

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Attractive and Unattractive Industry based on Porter’s Five Force Model

Few threats Suppliers & Strong threats

Suppliers &
from buyers have from
buyers have
substitute strong substitute
weak positions
products positions products

Intense
Low entry rivalry
Moderate barriers among
High entry competitors
rivalry
barriers
among Unattractive
Attractive competitors industry
industry

Low
High profit
profit potential
potential

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Strategic Groups Competitor Analysis/Four Corner

Strategic groups are clusters of companies within an industry that share Analysis
similar characteristics and pursue similar competitive strategies. It refers
to a group of firms in an industry following the same or a similar  The competitor environment is the final part of the external environment
requiring study. Competitor analysis focuses on each company against
strategy along the same strategic dimensions. A defining feature of which a firm directly competes.
strategic groups is that Internal competition between strategic group  Analysis of competitors is focused on predicting the dynamics of
firms is greater than between firms outside that strategic group, due to competitors' actions, responses & intentions. Competing firms are keenly
their overlapping strategies and target markets. interested in understanding each other’s objectives, strategies,
assumptions and capabilities. It is like playing chess – One needs to
understand the opponent's moves to develop his/her own winning
Strategic Dimensions Determining Strategic strategy.
 Furthermore, intense rivalry creates a strong need to understand
Groups competitors.
 The Four Corners Analysis, developed by Michael Porter, provides a
Strategic groups are defined by the dimensions along which firms structured framework to predict the dynamics of competitors’ actions,
position themselves. These dimensions reflect choices about how to responses, and intentions. This model examines four key dimensions—or
"corners"—of a competitor’s strategic posture: their drivers, current
compete and can include:
strategies, assumptions, and capabilities. By analyzing these corners,
 Extent of technological leadership firms can construct a holistic profile of their rivals, enabling better
preparation for competitive interactions.
 Product quality
The Four Corners of Competitor Analysis
 Pricing policies
 Distribution channels 1. Future Objectives (What drives the competitor?)
 Customer service  This corner explores the competitor’s goals, both short-term and long-
term, which act as the motivational drivers behind their actions.
Objectives might include market share growth, profitability targets, or
The concept of strategic groups is useful in several ways:
innovation leadership.
 It helps to understand who are the most direct competitors of any
given organization. 2. Current Strategy (What is the competitor doing and
 It focuses on what is the basis of competitive rivalry within each capable of doing?)
strategic group and how this is different from one group to another.
 It raises the question of how likely or possible it is for an  This focuses on the competitor’s explicit and implicit strategies, such as
organization to move from one strategic group to another. Mobility pricing, product differentiation, or geographic expansion. It reveals not
between groups depends on the extent to which there are barriers only what they are currently doing but also what they might be capable of
to entry between one group and another. doing in the near future.
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Competitor Analysis/Four Corner Analysis

3. Synthesis: Combine findings into a comprehensive competitor profile

3. Assumptions (What does the competitor believe?) that predicts likely actions and responses. This profile serves as a
 Competitors operate based on assumptions about themselves, their strategic tool for decision-making.
competitors, and the industry. These beliefs shape their strategic choices
and blind spots. 4. Continuous Monitoring: Competitor strategies evolve, necessitating
ongoing updates to the analysis.
4. Capabilities (What are the competitor’s strengths
and weaknesses?) Applications and Benefits
 This corner assesses the competitor’s resources and competencies, The Four Corners Analysis yields an anticipated response profile for each
including financial health, technological expertise, human capital, and
operational efficiency. It identifies where they excel and where they are competitor, enabling firms to:
vulnerable.
 Predict competitive moves, such as price wars or market entry.
 Identify opportunities to exploit competitor weaknesses or
Process of Conducting Four Corners Analysis misaligned assumptions.
 Adjust their own strategies proactively rather than reactively.
To operationalize the Four Corners model, firms follow a systematic
approach as follows:

1. Data Collection: Gather intelligence from diverse sources, including

market research reports, financial statements, competitor websites,
social media, press releases, and industry expert opinions.

2. Corner-by-Corner Analysis: Evaluate each of the four dimensions,

integrating qualitative and quantitative insights. For instance,
management interviews might reveal objectives, while patent filings
hint at capabilities.

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SWOT Analysis (External Environment)

SWOT analysis is a cornerstone of strategic management, offering a structured approach to evaluate a firm’s internal strengths and weaknesses
(S-W) alongside external opportunities and threats (O-T). This framework enables organizations to assess their competitive position and devise
strategies that leverage favorable conditions while mitigating risks. While the internal components (S-W) focus on a firm’s resources and
capabilities, the external analysis (O-T) draws on a systematic study of the broader environment, encompassing the macro/general
environment, industry environment, and competitor analysis. Hence, this part specifically focuses on the external dimensions—opportunities and
threats—highlighting how they emerge from these three levels of analysis.

OPPORTUNITIES: THREATS:
Opportunities represent favorable external conditions that a firm can
Threats are external conditions that could jeopardize a firm’s
exploit to enhance its competitive advantage or achieve strategic
performance, stability, or market position. They represent
goals. These arise from trends, shifts, or gaps in the external
unfavorable trends or events that, if unaddressed, might
environment that align with the firm’s capabilities or market position.
undermine the firm’s current or desired competitive standing.
Opportunities may include: Threats may include:
 Technological advancements  Economic downturns
 Economic growth  Technological changes, and new or revised regulations
 A previously overlooked market segment  Slow market growth
 Weakening competitive forces  The entrance of new competitors
 Changes in competitive or regulatory circumstances  Increased bargaining power of key buyers or suppliers
 Improved buyer or supplier relationships  Substitute Products
 Competitor weaknesses  Competitor strengths

Strategic Management 18
Yohannes Neda