Module 2 - Background

External Environment Analysis

SWOT Analysis

SWOT is an acronym for: Strengths, Weaknesses, Opportunities, and Threats. The first two variables (strengths and weaknesses) relate to the internal organization (Module 3). The last two variables (opportunities and threats) relate to the external environment (Module 2).

The purpose of an external analysis is to scan the outside environment for factors that might open up new opportunities for the business—or that may present threats to the survival of the organization. Then company managers and executives can formulate plans to take advantage of the opportunities and respond to external threats. Optimally, the organization wishes to altogether eliminate (and if this is not possible, to ameliorate to the greatest extent possible) those threats that exist in the external environment.

There are many external elements that can have an effect on a company’s sustainability. Customers, competitors, and suppliers are all pretty obvious entities that can affect profitability and practice. If we think a little more deeply, however, we can see that current as well as potential customers should be considered in an assessment of opportunities and threats (e.g., in terms of changing consumer tastes and preferences). Any such threats or opportunities will affect strategic choices that will be made concerning products and services.

What about technology? Advances in technology can affect all three of our "obvious" external concerns (customers, competitors, and suppliers) with changes in product features, how products are made and sold, what services are offered and how they are delivered, supply chains, inventory controls, and so on. The failure to monitor the technological environment can spell obsolescence for a business in no time.

Ease of substitution is something we always think of when considering competitors. How easy would it be to switch from flying on one airline to flying on another, for example? But thinking more creatively about substitution, we can see that teleconferencing and video conferencing can eliminate the need for much business travel—thus acting as a substitute to airline tickets. Failure to think broadly enough will cause a planner to completely miss a major threat just over the horizon. For example, consider the immeasurable impact that Internet sites such as eBay and Amazon have had on the sales of "brick-and-mortar" operations. Or consider how online video availability has adversely affected companies that sell or rent DVDs, such as Blockbuster.

The sheer number of possible external influences creating opportunities and threats is mind-boggling. This is why most strategic planners use analytic models to structure their thinking and help avoid perceptual biases that might interfere with a clear and objective identification of opportunities and threats.

In this course, we will be using two different models that approach the external environment from two different perspectives:

  1. Industry environment - Porter's Five Forces Model
  2. Macro environment - PEST analysis

Industry Environment

Porter's Model of Five Forces is one of the most versatile frameworks for analyzing the industry (or operating) external environment. Employed by a variety of academics and business practitioners for more than three decades, the Five Forces Model has proved its usefulness in a variety of arenas. The Porter model helps the user get a handle on the competitive and market characteristics of a specific industry. The factors covered by the Five Forces Model are:

  1. Threat of new entrants
  2. Bargaining power of suppliers
  3. Bargaining power of customers
  4. Availability of substitutes
  5. Degree of rivalry among competitors

Macro Environment

While the Porter analysis looks at the conditions in a specific industry, the PEST analysis looks at factors that affect the greater business environment. The subenvironments addressed by this model include:

  1. Political (including regulatory)
  2. Economic
  3. Sociocultural
  4. Technical

Required Reading

For a general introduction to the Five Forces Model, the following video interview with Michael Porter is helpful for putting the external analysis into perspective:

The Five Competitive Forces That Shape Strategy. (2008). Harvard Business Publishing. Podcast retrieved on November 6, 2012, from:

The following site is an excellent introduction to the industry (operating) and remote (macro) environments. This site gives a good overview of Porter's Five Forces and PEST. It will help you to complete key parts of the SLP as well.

Connelley, D. (2005). Strategy for the External Environment. Power Point Presentation.

Key forces in the external environment. (2009). Retrieved on November 6, 2012.

PEST analysis. (2009). Retrieved on November 6, 2012, from:

Porter's Five Forces: A model for industry analysis. (2007). Retrieved on November 6, 2012, from:

Case Reading

SWOT analysis: Lesson. (2009). Retrieved on November 6, 2012, from:

Zahorsky, D. (2009). A business owner's secret weapon: SWOT analysis. Retrieved on November 6, 2012, from:

Optional Material

Carrying out a PEST analysis. (2005). Retrieved on November 6, 2012, from:

PEST analysis. (2007). Retrieved on November 6, 2012, from:

Porter’s Five Forces. (2009). Retrieved on November 6, 2012, from:

Porter’s Five Forces (2007). Retrieved on November 6, 2012, from: