ICAI Notes: Strategic Analysis: External Environment | Financial Management & Strategic Management for CA Intermediate PDF Download

 Page 1


a
a
    
 
CHAPTER 
2 
 
 
 
 
 
LEARNING OUTCOMES 
STRATEGIC ANALYSIS: 
EXTERNAL  
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Examine the criticality of the business environment in strategic analysis.   
? Describe various elements of the domestic macro environment of 
business.  
? Utilise PESTLE Analysis as a tool for environmental analysis. 
? Situate a business in an industry and conduct industry analysis.  
? Analyse aspects related to competition in the industry with reference to 
Porter’s five competitive forces. 
 
Environmental analysis is the process by which strategists monitor the 
economic, governmental/legal, market/ competitive, supplier / 
technological, geographic and social settings to determine opportunities 
and threats to their firms.      William F. Glueck 
The analysis is the critical starting point of strategic thinking. Kenichi Ohmae 
 
 
 
 
© The Institute of Chartered Accountants of India
Page 2


a
a
    
 
CHAPTER 
2 
 
 
 
 
 
LEARNING OUTCOMES 
STRATEGIC ANALYSIS: 
EXTERNAL  
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Examine the criticality of the business environment in strategic analysis.   
? Describe various elements of the domestic macro environment of 
business.  
? Utilise PESTLE Analysis as a tool for environmental analysis. 
? Situate a business in an industry and conduct industry analysis.  
? Analyse aspects related to competition in the industry with reference to 
Porter’s five competitive forces. 
 
Environmental analysis is the process by which strategists monitor the 
economic, governmental/legal, market/ competitive, supplier / 
technological, geographic and social settings to determine opportunities 
and threats to their firms.      William F. Glueck 
The analysis is the critical starting point of strategic thinking. Kenichi Ohmae 
 
 
 
 
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
a
a
STRATEGIC MANAGEMENT 
 
2.2 
 
 
 
2.1 INTRODUCTION 
There are different kinds of business activities that take place in an organisational 
setting, and a cursory look into their world reflects a wide variety of organisations 
ranging from small local businesses to international or multinational corporations’ 
level. Generally, organisations are distinguished based on their size, type of 
products, markets, geographical coverage, legal status, and like because of vast 
organisational diversity.  
Whatever their size or other distinguishing feature they do not operate in a vacuum. 
They continuously act and react to what happens outside their periphery. The 
factors that are outside the business operations are typically referred to as 
organisational / business environment. In other words, and in the specific context 
of business, environment may be defined as a set of all external factors that weigh 
in the minds of the managers. Drawing an analogy with the term ‘atmosphere’ one 
could envision layers of such influences. See Figure- 
Strategic Analysis - External 
Environment
Strategic Analysis
Strategy and Business Environment
Understanding Product and 
Industry
Industry Environment Analysis
Market and Customer
Competitive Strategy
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 3


a
a
    
 
CHAPTER 
2 
 
 
 
 
 
LEARNING OUTCOMES 
STRATEGIC ANALYSIS: 
EXTERNAL  
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Examine the criticality of the business environment in strategic analysis.   
? Describe various elements of the domestic macro environment of 
business.  
? Utilise PESTLE Analysis as a tool for environmental analysis. 
? Situate a business in an industry and conduct industry analysis.  
? Analyse aspects related to competition in the industry with reference to 
Porter’s five competitive forces. 
 
Environmental analysis is the process by which strategists monitor the 
economic, governmental/legal, market/ competitive, supplier / 
technological, geographic and social settings to determine opportunities 
and threats to their firms.      William F. Glueck 
The analysis is the critical starting point of strategic thinking. Kenichi Ohmae 
 
 
 
 
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
a
a
STRATEGIC MANAGEMENT 
 
2.2 
 
 
 
2.1 INTRODUCTION 
There are different kinds of business activities that take place in an organisational 
setting, and a cursory look into their world reflects a wide variety of organisations 
ranging from small local businesses to international or multinational corporations’ 
level. Generally, organisations are distinguished based on their size, type of 
products, markets, geographical coverage, legal status, and like because of vast 
organisational diversity.  
Whatever their size or other distinguishing feature they do not operate in a vacuum. 
They continuously act and react to what happens outside their periphery. The 
factors that are outside the business operations are typically referred to as 
organisational / business environment. In other words, and in the specific context 
of business, environment may be defined as a set of all external factors that weigh 
in the minds of the managers. Drawing an analogy with the term ‘atmosphere’ one 
could envision layers of such influences. See Figure- 
Strategic Analysis - External 
Environment
Strategic Analysis
Strategy and Business Environment
Understanding Product and 
Industry
Industry Environment Analysis
Market and Customer
Competitive Strategy
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
 
STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT  
a
a
 
 
2.3 
 
The process of strategic formulation begins with a strategic analysis. Its objective 
is to compile information about internal and external environments in order to 
assess possibilities while formulating strategic objectives and contemplating 
strategic activities. In this chapter various aspects of external environment are 
covered with the perspective of strategic analysis. We will also attempt to 
understand how to identify, and tackle strategies to adapt within complex and 
turbulent external environment. 
2.2 STRA GIC ANALYSIS 
Strategy formulation is not a task in which managers can get by with intuition, 
opinions, instincts, and creative thinking. Judgments about what strategies to 
pursue need to flow directly from analysis of a firm’s external environment and its 
internal resources and capabilities. Environmental scanning is a natural and 
continuous activity for every  business and some do it on an informal basis, while 
International Politico-legal, 
Socio-cultural,  Economic, 
Decomgrpahic,  Ecological 
and Teachnological 
Environment
Domestic Politico-legal, 
Socio-cultural, Economic, 
Decomgrpahic,  Ecological 
and Teachnological 
Environment 
Industry shaping 
competitive force
Firm's 
stakeholders
Firm's Internal 
Environment
© The Institute of Chartered Accountants of India
Page 4


a
a
    
 
CHAPTER 
2 
 
 
 
 
 
LEARNING OUTCOMES 
STRATEGIC ANALYSIS: 
EXTERNAL  
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Examine the criticality of the business environment in strategic analysis.   
? Describe various elements of the domestic macro environment of 
business.  
? Utilise PESTLE Analysis as a tool for environmental analysis. 
? Situate a business in an industry and conduct industry analysis.  
? Analyse aspects related to competition in the industry with reference to 
Porter’s five competitive forces. 
 
Environmental analysis is the process by which strategists monitor the 
economic, governmental/legal, market/ competitive, supplier / 
technological, geographic and social settings to determine opportunities 
and threats to their firms.      William F. Glueck 
The analysis is the critical starting point of strategic thinking. Kenichi Ohmae 
 
 
 
 
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
a
a
STRATEGIC MANAGEMENT 
 
2.2 
 
 
 
2.1 INTRODUCTION 
There are different kinds of business activities that take place in an organisational 
setting, and a cursory look into their world reflects a wide variety of organisations 
ranging from small local businesses to international or multinational corporations’ 
level. Generally, organisations are distinguished based on their size, type of 
products, markets, geographical coverage, legal status, and like because of vast 
organisational diversity.  
Whatever their size or other distinguishing feature they do not operate in a vacuum. 
They continuously act and react to what happens outside their periphery. The 
factors that are outside the business operations are typically referred to as 
organisational / business environment. In other words, and in the specific context 
of business, environment may be defined as a set of all external factors that weigh 
in the minds of the managers. Drawing an analogy with the term ‘atmosphere’ one 
could envision layers of such influences. See Figure- 
Strategic Analysis - External 
Environment
Strategic Analysis
Strategy and Business Environment
Understanding Product and 
Industry
Industry Environment Analysis
Market and Customer
Competitive Strategy
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
 
STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT  
a
a
 
 
2.3 
 
The process of strategic formulation begins with a strategic analysis. Its objective 
is to compile information about internal and external environments in order to 
assess possibilities while formulating strategic objectives and contemplating 
strategic activities. In this chapter various aspects of external environment are 
covered with the perspective of strategic analysis. We will also attempt to 
understand how to identify, and tackle strategies to adapt within complex and 
turbulent external environment. 
2.2 STRA GIC ANALYSIS 
Strategy formulation is not a task in which managers can get by with intuition, 
opinions, instincts, and creative thinking. Judgments about what strategies to 
pursue need to flow directly from analysis of a firm’s external environment and its 
internal resources and capabilities. Environmental scanning is a natural and 
continuous activity for every  business and some do it on an informal basis, while 
International Politico-legal, 
Socio-cultural,  Economic, 
Decomgrpahic,  Ecological 
and Teachnological 
Environment
Domestic Politico-legal, 
Socio-cultural, Economic, 
Decomgrpahic,  Ecological 
and Teachnological 
Environment 
Industry shaping 
competitive force
Firm's 
stakeholders
Firm's Internal 
Environment
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
a
a
STRATEGIC MANAGEMENT 
 
2.4 
others have a formal structure to collect meaningful information. It is just as 
important to learn about changes in tax regulations through television news as it 
is through a well-established reading material from experts. The capacity to collect 
important information in informal settings usually separates great entrepreneurs 
and managers. Using just informal techniques, on the other hand, exposes the 
organisation to missed opportunities and unanticipated hazards. A systematic 
approach to environmental assessment is essential for managing risk and 
uncertainty. 
The majority of the rapidly expanding organisations use strategic planning 
throughout various stages of their operations. The strategic analysis is a component 
of business planning that has a methodical approach, makes the right resource 
investments, and may assist business in achieving its objective. It forces to think 
about the rivals and aids in the evaluation of business plans to stay ahead of the 
competition.  The two important situational considerations are: 
(1)  industry and competitive conditions, and  
(2) an organisation’s own capabilities, resources, internal strengths, weaknesses, 
and market position. 
Figure: Strategic Analysis 
The analytical sequence is from strategic appraisal of the external and internal 
situation to evaluation of alternatives of strategies, to the final choice of strategy. 
 
  
Evaluation 
Current 
Vision 
Mission 
Goals 
Strategies 
Identify 
Strength, 
Weakness 
Internal 
Analysis 
Identify 
Opportunity, 
Threats 
External 
Analysis 
 
Analysis 
© The Institute of Chartered Accountants of India
Page 5


a
a
    
 
CHAPTER 
2 
 
 
 
 
 
LEARNING OUTCOMES 
STRATEGIC ANALYSIS: 
EXTERNAL  
ENVIRONMENT 
 
 
 
 
After studying this chapter, you will be able to: 
? Examine the criticality of the business environment in strategic analysis.   
? Describe various elements of the domestic macro environment of 
business.  
? Utilise PESTLE Analysis as a tool for environmental analysis. 
? Situate a business in an industry and conduct industry analysis.  
? Analyse aspects related to competition in the industry with reference to 
Porter’s five competitive forces. 
 
Environmental analysis is the process by which strategists monitor the 
economic, governmental/legal, market/ competitive, supplier / 
technological, geographic and social settings to determine opportunities 
and threats to their firms.      William F. Glueck 
The analysis is the critical starting point of strategic thinking. Kenichi Ohmae 
 
 
 
 
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
a
a
STRATEGIC MANAGEMENT 
 
2.2 
 
 
 
2.1 INTRODUCTION 
There are different kinds of business activities that take place in an organisational 
setting, and a cursory look into their world reflects a wide variety of organisations 
ranging from small local businesses to international or multinational corporations’ 
level. Generally, organisations are distinguished based on their size, type of 
products, markets, geographical coverage, legal status, and like because of vast 
organisational diversity.  
Whatever their size or other distinguishing feature they do not operate in a vacuum. 
They continuously act and react to what happens outside their periphery. The 
factors that are outside the business operations are typically referred to as 
organisational / business environment. In other words, and in the specific context 
of business, environment may be defined as a set of all external factors that weigh 
in the minds of the managers. Drawing an analogy with the term ‘atmosphere’ one 
could envision layers of such influences. See Figure- 
Strategic Analysis - External 
Environment
Strategic Analysis
Strategy and Business Environment
Understanding Product and 
Industry
Industry Environment Analysis
Market and Customer
Competitive Strategy
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
 
STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT  
a
a
 
 
2.3 
 
The process of strategic formulation begins with a strategic analysis. Its objective 
is to compile information about internal and external environments in order to 
assess possibilities while formulating strategic objectives and contemplating 
strategic activities. In this chapter various aspects of external environment are 
covered with the perspective of strategic analysis. We will also attempt to 
understand how to identify, and tackle strategies to adapt within complex and 
turbulent external environment. 
2.2 STRA GIC ANALYSIS 
Strategy formulation is not a task in which managers can get by with intuition, 
opinions, instincts, and creative thinking. Judgments about what strategies to 
pursue need to flow directly from analysis of a firm’s external environment and its 
internal resources and capabilities. Environmental scanning is a natural and 
continuous activity for every  business and some do it on an informal basis, while 
International Politico-legal, 
Socio-cultural,  Economic, 
Decomgrpahic,  Ecological 
and Teachnological 
Environment
Domestic Politico-legal, 
Socio-cultural, Economic, 
Decomgrpahic,  Ecological 
and Teachnological 
Environment 
Industry shaping 
competitive force
Firm's 
stakeholders
Firm's Internal 
Environment
© The Institute of Chartered Accountants of India
STRATEGIC MANAGEMENT  
a
a
STRATEGIC MANAGEMENT 
 
2.4 
others have a formal structure to collect meaningful information. It is just as 
important to learn about changes in tax regulations through television news as it 
is through a well-established reading material from experts. The capacity to collect 
important information in informal settings usually separates great entrepreneurs 
and managers. Using just informal techniques, on the other hand, exposes the 
organisation to missed opportunities and unanticipated hazards. A systematic 
approach to environmental assessment is essential for managing risk and 
uncertainty. 
The majority of the rapidly expanding organisations use strategic planning 
throughout various stages of their operations. The strategic analysis is a component 
of business planning that has a methodical approach, makes the right resource 
investments, and may assist business in achieving its objective. It forces to think 
about the rivals and aids in the evaluation of business plans to stay ahead of the 
competition.  The two important situational considerations are: 
(1)  industry and competitive conditions, and  
(2) an organisation’s own capabilities, resources, internal strengths, weaknesses, 
and market position. 
Figure: Strategic Analysis 
The analytical sequence is from strategic appraisal of the external and internal 
situation to evaluation of alternatives of strategies, to the final choice of strategy. 
 
  
Evaluation 
Current 
Vision 
Mission 
Goals 
Strategies 
Identify 
Strength, 
Weakness 
Internal 
Analysis 
Identify 
Opportunity, 
Threats 
External 
Analysis 
 
Analysis 
© The Institute of Chartered Accountants of India
 
 
 
STRATEGIC ANALYSIS: EXTERNAL ENVIRONMENT  
a
a
 
 
2.5 
Accurate diagnosis of the business situation is necessary for managerial 
preparation to decide on a sound long-term direction, setting appropriate 
objectives, and crafting a winning strategy. Without perceptive understanding of 
the strategic aspects of a company’s external and internal environments, the 
chances are greatly increased that managers will finalize a strategic game plan that 
doesn’t fit the situation well, that holds little prospect for bu ilding competitive 
advantage, and that is unlikely to boost company performance. 
The strategic analysis is a continuous process which is not without limitations. There 
are two major limitations of strategic analysis that we need to be aware of. First, it 
gives a lot of innovative options but doesn't tell which one to pick. The options can 
be overlapping, confusing or difficult to implement. Second, it can be time-
consuming at times, hurting overall organisational functioning and also strain other 
efficient innovations such as developing a new product or a service. 
2.2.1 Issues to consider for Strategic Analysis  
Strategy evolves over a period of time: Each strategic decision must balance the 
different factors that impact and constrain strategy. A key element of strategic 
analysis is the probable outcomes of everyday decisions. A current strategy is the 
result of several little choices taken over a protracted period of time. A 
management radically changes strategy when they try to speed up the 
organisational growth. Strategy is influenced by experience, but it has to be 
updated when the results become clear. It therefore evolves with time. 
Balance of external and internal factors: In practise, strategic analysis 
necessitates creating a reasonable balance between many and conflicting 
challenges, because a perfect fit between them is unlikely. Management must 
consider opportunities, influences, and constraints while taking a strategic decision. 
There are factors driving a decision, such as entering a new market. Concurrently, 
there exist constraints that limit the option, such as the presence of a large 
opponent. These limiting constraints will have various implications on the kind, 
degree, volume, and significance of the impact. While some of these aspects are 
under your control, there will be others way beyond the existing capabilities. 
 
© The Institute of Chartered Accountants of India