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competencies. Specifically, VRIO analysis should show you the importance of value,
rarity, inimitability, and organization as building blocks of competitive advantage.
EXERCISES
1. What is the objective of internal analysis?
2. What is the difference between a resource and a capability?
3. What is the difference between a tangible and an intangible resource or

capability?
4. What is a core competency?
5. What framework helps you identify those resources, capabilities, or core
competencies that provide competitive advantage?
6. Why might competitive advantage for a firm be fleeting?

5.5 Developing Strategy Through External Analysis
LEARNING OBJECTIVES
1. Understand the basics of general environment analysis.
2. See the components of microenvironment analysis that support industry
analysis.
3. Learn the features of Porter’s Five Forces industry analysis.
In this section, you will learn about some of the basic external inputs for
strategy formulation—the determinants of a firm’s opportunities and threats. We will
focus on three aspects of external analysis here, though you recognize that these
should be complemented by internal analysis as well. For the external environment, it
is best to start with the general environment, and then work your way into the focal
industry or industry segment.
The General Environment
When appraising the external environment of the organization you will
typically start with its general environment. But what does this mean? The general
environment is composed of dimensions in the broader society that influence an
[1]
industry and the firms within it. We group these dimensions into six segments:
political, economic, social, technical or technological, environmental, and legal. You
can use the simple acronym, PESTEL, to help remind you of these six general
environment segments. Examples of elements analyzed in each of these segments are
shown next.
Table 5.1 PESTEL Analysis
Political Economic

How stable is the political What are current and forecast
environment? interest rates?

What are local taxation policies, and What is the level of inflation,
how do these affect your business? what is it forecast to be, and how does
this affect the growth of your market?

Is the government involved in trading What are local employment
agreements such as EU, NAFTA, ASEAN, levels per capita and how are they
or others? changing?

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