Analyzing the External and Internal Environment: formula sheet

Key formulas

PESTEL factors

P + E + S + T + E + L = Political, Economic, Social, Technological, Environmental, Legal

Remember the order. Write all six headings in every answer, even if one has fewer points.

PEST vs PESTEL

PESTEL = PEST + Environmental + Legal

This is the standard difference. PEST covers four factors; PESTEL covers six.

Link to SWOT

PESTEL findings → Opportunities (O) and Threats (T) in SWOT

PESTEL looks outside the firm. Strengths and weaknesses come from internal analysis.

Impact judgement

Factor → Trend → Effect on firm → Opportunity or Threat → Strategic response

Use this chain for every point you write to move from description to analysis.

Five forces

Industry profit potential = f(entrants, suppliers, buyers, substitutes, rivalry)

Not a numeric formula. Stronger forces mean lower profit potential and a less attractive industry.

Entry barriers

Economies of scale, capital needs, product differentiation, switching costs, distribution access, government policy, cost advantages independent of scale

High barriers weaken the threat of new entrants.

Industry life cycle

Introduction → Growth → Maturity → Decline

Use it to say how rivalry, growth and profits are likely to change.

Key success factors

KSF = what customers want + what a firm needs to survive competition

List only the few factors that truly decide success in the industry.

Attractiveness conclusion

Weak forces = attractive industry; strong forces = unattractive industry

Always judge force by force, then give an overall view.

Competitor analysis framework

Rival's response profile = Future goals + Current strategy + Assumptions + Capabilities

Four-component approach. Use it as a checklist for each named competitor.

Power-Interest grid

High power, high interest = Manage closely | High power, low interest = Keep satisfied | Low power, high interest = Keep informed | Low power, low interest = Monitor

Often attributed to Mendelow. Place every stakeholder in one box and state the action.

Stakeholder classes

Internal (owners, directors, employees) vs External (customers, suppliers, lenders, government, community)

Some texts also split into primary and secondary stakeholders. Use the split your question asks for.

Resource classification

Resources = Tangible (physical, financial, organisational) + Intangible (brand, patents, goodwill, know-how, culture)

Always give at least one example under each head.

Capability

Capability = Resources × Organisational skill in using them

A conceptual expression, not a numeric formula. Capabilities are built through routines and learning.

Core competency tests (VRIN/VRIO)

Valuable + Rare + Costly to Imitate + (Non-substitutable or Organised to exploit)

Meeting all tests gives sustained advantage. Meeting fewer gives temporary advantage or parity. Textbooks differ on the fourth test, so name the one you use.

Competitive advantage link

Resources → Capabilities → Core competencies → Competitive advantage

Use this chain as the skeleton of any descriptive answer.

Primary activities

Inbound logistics + Operations + Outbound logistics + Marketing and sales + Service

Directly involved in creating and delivering the product. Remember the order, which follows the flow of the product.

Support activities

Procurement + Technology development + Human resource management + Firm infrastructure

They support all primary activities. Firm infrastructure covers general management, finance, planning, legal and quality.

Margin

Margin = Total value (what buyers pay) − Total cost of all value activities

Advantage comes from widening this gap, either by lowering cost or by raising the price buyers accept.

Sources of advantage

Cost advantage = performing activities at lower cost; Differentiation = performing activities in a unique way valued by buyers

These link to Porter's generic strategies of cost leadership and differentiation.

SWOT classification rule

Internal factors = Strengths + Weaknesses; External factors = Opportunities + Threats

Test every point: is it inside the firm's control (internal) or outside it (external)?

TOWS matrix: SO strategy

Strength + Opportunity = growth / offensive strategy

Use internal advantages to exploit external openings.

TOWS matrix: WO strategy

Weakness + Opportunity = turnaround / improvement strategy

Use an external opening to remove an internal gap.

TOWS matrix: ST strategy

Strength + Threat = defensive use of strength

Use internal advantages to cushion or counter an external risk.

TOWS matrix: WT strategy

Weakness + Threat = retrenchment / exit / survival strategy

The most vulnerable position. Aim to minimise losses.

Relative market share

Relative market share = Your unit's market share ÷ Market share of the largest competitor

A value above 1 means you are the market leader. In BCG, the cut-off between high and low is commonly taken as 1, unless the question gives another.

BCG classification

High growth + high share = Star; Low growth + high share = Cash cow; High growth + low share = Question mark; Low growth + low share = Dog

Growth is on the vertical axis and relative share on the horizontal axis.

GE matrix axes

Industry attractiveness × Business strength, each rated high / medium / low

Gives nine cells. Both axes are composite scores of several factors.

McKinsey 7S

Hard: Strategy, Structure, Systems. Soft: Shared values, Skills, Style, Staff

Shared values sit at the centre because they link all the other elements.

Quick revision

• External analysis looks at the macro environment, the industry, competitors and stakeholders.
• PESTEL covers Political, Economic, Social, Technological, Environmental and Legal factors.
• Porter's Five Forces: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing competitors.
• Strong forces reduce industry profitability; weak forces support it.
• Internal analysis studies resources (tangible and intangible) and capabilities.
• Core competencies are capabilities that give a lasting advantage over rivals.
• The value chain splits activities into primary and support activities.
• SWOT: strengths and weaknesses are internal; opportunities and threats are external.
• The TOWS matrix pairs external and internal factors to generate strategy options.
• The BCG matrix classifies businesses by market growth and relative market share into stars, cash cows, question marks and dogs.
• Benchmarking compares your performance and practices against a standard or best performer.
• In answers, tie every point to the facts of the case.

Common mistakes

• Treating internal and external factors as the same just because both affect strategy. Fix: Always state control: internal is controllable, external is largely uncontrollable.
• Calling a competitor's action or a new law a weakness or strength. Fix: Strengths and weaknesses are internal only. Opportunities and threats are external only.
• Mixing internal factors such as staff skills, brand or plant capacity into PESTEL. Fix: Keep PESTEL external. Move internal points to strengths and weaknesses in internal analysis.
• Listing facts without saying how they affect the firm. Fix: Add an effect and an opportunity or threat label to every point.
• Listing the five forces with definitions but no application to the case Fix: For each force write a verdict and a fact from the case. A definition alone earns little.
• Treating complements, government or the macro environment as a sixth force in the answer Fix: Keep the five forces as given. Mention government or technology only as factors that shape a force, such as licensing raising entry barriers.
• Mixing up the macro environment and the operating environment Fix: State that PESTEL covers broad forces, while competitors, suppliers, customers and other stakeholders form the operating environment.
• Listing competitors without analysing them Fix: For each rival, write at least its likely strategy and one strength or weakness, then say how the firm should respond.
• Treating resources and capabilities as the same thing. Fix: Say resources are what the firm has, capabilities are what the firm can do with them.
• Calling every strength a core competency. Fix: Name the tests and show that the item passes them. Otherwise call it a resource or a threshold capability.

Exam tips

• Open with a one-line definition, then split into internal and external. Examiners look for this structure first.
• In case questions, quote facts from the case and classify each one. Do not write only theory.
• Use the control test to justify every classification. It earns marks for reasoning.
• Mention continuous scanning and its link to strategy formulation in your conclusion.
• If asked to differentiate, write point-wise on meaning, control, nature, examples and result (strengths and weaknesses versus opportunities and threats).
• Always draw the six headings first. Examiners look for structure, and it helps you cover all factors.
• Use the facts in the case study. Add Indian examples only to fill gaps.
• Label each point as an opportunity or a threat. This shows analysis and earns more marks than description.