UNIT II STUDY GUIDE

Analyzing the Firm Internally and

Externally: The Importance of
Understanding the Environment

Course Learning Outcomes for Unit II

At the end of this unit, you should be able to:

2. Analyze the processes for formulating sustainable corporate business strategies.

2.2. Examine key models that organizations use to overcome challenges.

Required Unit Resources

Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups (ULO 2.2)
This chapter examines the PESTEL framework and the five forces model.

Chapter 4: Internal Analysis: Resources, Capabilities, and Core Competencies (ULO 2.2)
This chapter explores external and internal analysis, core competencies, the resource-based view, strategic
activity systems, and implications for strategic leaders.

Unit Lesson
Lesson: Analyzing the Firm and Its Environment (ULO 2.2)

Introduction

In this unit, we will explore the importance of understanding the environment (internal and external) within
which firms operate. At the outset, firms operate in a turbulent environment with an aging workforce and
changes in technology impacting operations globally. In turbulent times, many firms utilize a formal strategic
planning process. The Airbnb’s pandemic pivot case in Chapter 3 of the textbook illustrates the use of
strategic planning in addressing the COVID-19 pandemic.

Models Used by Firms

There are a number of models that firms use to assess their environments:

• SWOT (Strengths, weaknesses, opportunities, and threats)

• PESTEL (Political, economic, social, technological, environmental, and legal)
• Porter’s Five Forces

Each of these models affords a system to assist in understanding the firm and the environment within which it
operates.

SWOT

The SWOT model is a very common framework that includes strengths, weaknesses, opportunities, and
threats. Strengths and weaknesses are used to understand internal elements, whereas opportunities and
threats are external. For example, internal elements of a firm can include the shared actions, values, and
beliefs in an organization that guide the behavior of its members and define its organizational culture. It is
important to perform an internal analysis of an organization to understand its strengths and weaknesses. This
gives the company a better understanding of where to concentrate its resources and capabilities to deliver
better products and services to its customers. In addition, firms are subject to external factors that can be very
important in the success or failure of that firm. For example, rising energy costs are an external threat to many
companies. An opportunity often identified by many firms is the enhanced use of technology to manage costs.

BUS 6320, Global Strategic Management 1

Combined, the elements of strength, weakness, opportunities, and threats canUNITassist in developing
x STUDY GUIDE a
business strategy. The course textbook illustrates Strategic Questions within the SWOT Matrix in Exhibit 4.11.
Title
PESTEL

Another model used to assess internal and external factors impacting an organization is PESTEL. Essentially,
a PESTEL analysis studies the key external factors—political, economic, sociological, technological,
environmental, and legal—that influence an organization. It can be used in a range of different scenarios and
can guide people, professionals, and senior managers in strategic decision-making. In Chapter 3, Rothaermel
(2024) highlights the increasing importance of technology, including artificial intelligence, as a key factor
driving change and the need for strategic planning in firms. Overall, the PESTEL framework is discussed in
Chapter 3 of the textbook and presented in Exhibit 3.1: The Firm within its External Environment, Industry,
and Strategic Group, Subject to PESTEL Factors. Using a PESTEL analysis can assist in highlighting
opportunities and threats that may impact the firm.

Porter’s Five Forces

Harvard University Business Professor Michael Porter developed the five forces model in 1979. Porter notes
that the five forces model provides a framework to understand where a firm is today, what the competition in
the sector looks like, and how to position the firm for success by gaining and sustaining competitive
advantage (Institute for Strategy & Competitiveness, n.d.).

Porter notes that each industry is different, but the underlying factors for success are common:

• competition in the industry,

• potential of new entrants into the industry,
• power of suppliers,
• power of customers, and
• threat of substitute products (Institute for Strategy & Competitiveness, n.d.).

Internal and External Factors

The course textbook explains the importance of correctly identifying and understanding the existing and
anticipated internal and external factors impacting the firm. It also identifies the five major forces that shape
average firm profitability within the industries. According to Rothaermel (2024), these factors include:

• “growth rates,
• employment levels,
• interest rates,
• price stability (inflation and deflation),
• currency exchange rates” (p. 84).

Essentially, these factors drive the competitive advantage of a firm.

These five forces are imperative for developing a strategy. The course textbook provides you opportunities to
investigate situations in which entry into attractive and unattractive industries follows “new thinking” rather
than conventional wisdom. Finally, you will identify the factors within the general environment that affect the
firm and the sector’s profitability.

Core Competencies

Rothaermel (2024) explains that core competencies are those which are unique to a firm, including its
strengths, and its differentiation of products and services from those of its competitors. As you read the
Chapter Case 4: Five Guys’ Core Competency: “Make the Best Burger. Don’t Worry About Cost,” consider
how the core competencies are critical to securing and sustaining competitive advantage. In this case, Five
Guys has developed a product that is more expensive than its competition. The core competency identified by
Five Guys is about product quality—not cost.

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 Resources-Based View UNIT x STUDY GUIDE
Title
Rothaermel (2024) notes that resources can be tangible (e.g., labor, capital, and land) and intangible (e.g.,
culture, reputation, and intellectual property). This resource-based view is illustrated in Exhibit 4.5: Tangible
and Intangible Resources.

The VRIO Framework

A common model to illustrate the resource capability of a firm is the VRIO framework. VRIO stands for
valuable, rare, imitate, and organized, as illustrated in Exhibit 4.6: Applying the VRIO Framework to Reveal
Competitive Advantage. An example of the application of the VRIO framework is contained in the Strategy
Highlight 4.2 of the course textbook.

Defining a Business Strategy

Overall, defining a business strategy is part of the strategic planning process and is necessary for achieving
the company’s goals and objectives. The steps involved in creating a business strategy are critical, and it is
imperative that the appropriate amount of time is spent in getting it just right. Depending on the faculty for this
course, the live lecture for this unit may introduce the global reporting initiative (GRI) as a strategic tool that
many firms use. The GRI has been active for more than 25 years developing and delivering a framework to
assist firms globally in the communication and implementation of actions that reflect the support for the
environment, economy, and people (Global Reporting Initiative, n.d.).

Summary

The strategic planning process is essentially about using a facts-based system to develop an understanding
of the factors—internal and external—impacting a firm. Of course, these factors are dynamic and subject to
change. In that regard, strategic planning should be viewed as a continuous process and not a one-off type of
assessment. Developing an appropriate strategic plan can assist a firm in achieving and sustaining a position
of comparative advantage.

References

Global Reporting Initiative. (n.d.). The global leader for impact reporting . https://www.globalreporting.org/

Institute for Strategy & Competitiveness. (n.d.). The five forces. Harvard Business School.
https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx

Rawpixel. (n.d.). Character illustration of people with global network concept [Image]. Freepik.
https://www.freepik.com/free-vector/character-illustration-people-with-global-network-
concept_3585190.htm#query=strategy%20global%20business%20planning&position=2&from_view=
search&track=ais&uuid=eab5dd3f-267d-4ae8-9a3a-5381e987b5ac

Rothaermel, F. T. (2024). Strategic management (6th ed.). McGraw Hill.

https://online.vitalsource.com/#/books/9781265954574

Vector4stock. (n.d.). Business process illustration infographic of business structure from idea to successful
business [Image]. Freepik.
https://www.freepik.com/free-vector/business-process-illustration-infographic-business-structure-from-
idea-successful-business-
project_26195295.htm#query=strategy%20global%20business%20planning&position=34&from_view
=search&track=ais&uuid=eab5dd3f-267d-4ae8-9a3a-5381e987b5ac

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Learning Activities (Nongraded) UNIT x STUDY GUIDE
Title
Nongraded Learning Activities are provided to aid you in your course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.

Activity: How to Conduct a Case Analysis (Optional)

Consider reviewing Part 4: MiniCases of the course textbook. The section, How to conduct a case analysis,
provides an overview of the key components of developing and presenting details on a firm and uses a case
study approach to understanding a firm.

Activity: Applying the Five Forces Model (Optional)

In Chapter 3 of the textbook, the author provides information in a section titled: Applying the Five Forces
Model to U.S. Airline Industry. Read this case. Do you agree that the customer is better off based on the
details in this case? Write your thoughts in a personal journal.

Activity: MiniCase (Optional)

You may want to read the Mini-Case 11: Chick-fil-A’s Structure, Culture, and Control in the course textbook.
This case provides a very useful discussion of the importance of understanding the strengths and
weaknesses of a firm operating in a competitive sector.

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