BST · Professional Level

Strategic Analysis

External analysis: PESTEL analysis, industry analysis (Porter's Five Forces — detailed with examples), strategic groups, competitor analysis. Internal analysis: resource audit, value chain analysis (primary and support activities), the VRIO framework, core competences (Prahalad and Hamel), dynamic capabilities. Synthesis: SWOT analysis as the bridge between external and internal analysis.

40 min read

Learning Objectives

•Apply PESTEL analysis to assess the macro-environment of an organisation
•Apply Porter's Five Forces framework to analyse industry attractiveness and competitive dynamics
•Explain the concept of strategic groups and how they are used in competitor analysis
•Conduct an internal analysis using the resource audit and value chain analysis
•Apply the VRIO framework to evaluate whether resources provide sustained competitive advantage
•Explain core competences (Prahalad and Hamel) and dynamic capabilities
•Prepare a SWOT analysis that synthesises external and internal analysis

PESTEL Analysis — The Macro-Environment

PESTEL analyses the macro-environment — the broad external factors that affect all organisations in an industry. It identifies opportunities and threats that the organisation cannot directly control but must respond to.

Factor	Key considerations	Examples
Political	Government policy, political stability, trade policy, taxation policy, regulation/deregulation, government spending	Brexit impact on trade, government subsidies for green energy, changes in corporation tax rate, sanctions
Economic	GDP growth, interest rates, inflation, exchange rates, unemployment, consumer confidence, disposable income, business cycles	Recession reducing consumer spending, rising interest rates increasing borrowing costs, currency depreciation making exports competitive
Social	Demographics, cultural attitudes, lifestyle changes, education levels, health consciousness, population growth/ageing, social mobility	Ageing population increasing demand for healthcare, shift to remote working, growing demand for sustainable/ethical products
Technological	R&D activity, automation, digitalisation, rate of technological change, technology incentives, IP protection	AI disrupting professional services, cloud computing reducing IT costs, e-commerce growth, blockchain applications
Environmental	Climate change, environmental regulations, carbon emissions targets, sustainability, waste management, resource scarcity	Net zero targets, carbon taxes, plastic bans, ESG reporting requirements, extreme weather events disrupting supply chains
Legal	Employment law, health and safety, consumer protection, competition law, data protection, IP law	GDPR compliance costs, minimum wage increases, new whistleblowing protections, competition authority investigations

Using PESTEL effectively: Do not just list factors — analyse their impact on the specific organisation and assess whether each represents an opportunity or threat. Focus on factors that are most significant and most likely to change. PESTEL is a starting point for strategic analysis, not an end in itself.

Porter's Five Forces — Industry Analysis

Porter's Five Forces (1980) analyses the competitive structure of an industry to determine its attractiveness (profitability potential). The stronger the forces, the more competitive the industry and the lower the potential for sustained profitability.

Force	Key determinants	High when...
1. Threat of new entrants	Barriers to entry: economies of scale, capital requirements, brand loyalty, access to distribution, government regulation, switching costs, proprietary technology, expected retaliation	Barriers are LOW — easy for new competitors to enter, increasing competition and reducing profitability. Examples of high barriers: pharmaceuticals (R&D costs, regulation), airlines (capital, slots), banking (regulation, capital requirements).
2. Bargaining power of suppliers	Number of suppliers, uniqueness of their product, switching costs, threat of forward integration, importance of volume to supplier	Few suppliers, unique/differentiated inputs, high switching costs, credible threat of forward integration. Example: Intel supplying processors to PC manufacturers — few alternatives, high switching costs.
3. Bargaining power of buyers	Number of buyers, volume of purchases, product differentiation, switching costs, price sensitivity, buyer information, threat of backward integration	Few large buyers, undifferentiated products, low switching costs, price-sensitive buyers, credible backward integration threat. Example: major supermarkets buying from food producers — enormous volume, multiple alternative suppliers.
4. Threat of substitutes	Availability of alternative products/services, price-performance ratio of substitutes, switching costs, buyer propensity to switch	Attractive substitutes available, low switching costs. Example: streaming services substituting for cinemas and traditional TV, video calls substituting for business travel.
5. Competitive rivalry	Number and size of competitors, industry growth rate, fixed costs, product differentiation, exit barriers, strategic stakes	Many equal-sized competitors, slow/declining growth, high fixed costs (pressure to fill capacity), low differentiation, high exit barriers. Example: airline industry — many competitors, high fixed costs, low differentiation on short-haul routes.

Application: The Five Forces determine the average profitability of an industry, not the profitability of a specific firm. A firm can earn above-average returns within a structurally unattractive industry if it achieves a strong competitive position (see Porter's generic strategies). The framework helps managers understand the competitive dynamics and identify strategies to improve their position (e.g., increasing barriers to entry, differentiating to reduce buyer power, reducing dependence on powerful suppliers).

Limitations: Static (snapshot, not dynamic), assumes clear industry boundaries (increasingly blurred by digital disruption), focuses on competition (not collaboration — ignores value of alliances and ecosystems), does not address the role of government or complementors as a "sixth force."

Strategic Groups and Competitor Analysis

Strategic groups: Within an industry, firms can be grouped into strategic groups — clusters of firms following similar strategies on key dimensions (e.g., price, quality, geographic scope, degree of vertical integration, product range, brand identity). Firms within the same strategic group compete most directly with each other.

Uses of strategic group analysis:

Identifies the firm's closest competitors (same group) and potential competitors (adjacent groups)
Reveals mobility barriers — the barriers to moving from one strategic group to another (e.g., moving from budget to premium requires brand investment)
Identifies strategic gaps — unoccupied positions that may represent opportunities

Competitor analysis: Understanding competitors' objectives, strategies, assumptions, and capabilities. A framework for structured competitor analysis:

What drives the competitor? Their objectives (growth, market share, profitability, survival) and assumptions about the industry
What is the competitor doing? Their current strategy — how they compete (on price, quality, innovation, service)
What can the competitor do? Their capabilities — strengths and weaknesses (resources, competences, financial position)
What will the competitor do? Their likely response to our strategic moves — will they retaliate? match? ignore?

Internal Analysis — Resources, Value Chain, and VRIO

Internal analysis assesses the organisation's strengths and weaknesses — the resources and capabilities that determine its ability to compete.

Resource Audit

A systematic inventory of the organisation's resources across four categories:

Physical resources: Facilities, equipment, technology, geographic location, access to raw materials
Financial resources: Cash, borrowing capacity, credit rating, profitability, cash flow generation
Human resources: Skills, knowledge, experience, adaptability, leadership, employee engagement, employer brand
Intellectual resources: Patents, trademarks, copyrights, proprietary know-how, brand reputation, organisational culture, databases, processes, relationships

Resources alone do not create competitive advantage — it depends on how they are deployed and combined (capabilities).

Value Chain Analysis (Porter, 1985)

The value chain disaggregates the firm into its strategically relevant activities to understand the sources of cost advantage and differentiation. It identifies where value is created and where improvements can be made.

Primary activities (directly involved in creating and delivering the product/service):

Inbound logistics: Receiving, storing, and distributing inputs (warehousing, materials handling, inventory control)
Operations: Transforming inputs into the final product/service (manufacturing, assembly, quality control)
Outbound logistics: Distributing the product to customers (order processing, warehousing, transportation, delivery)
Marketing and sales: Identifying customer needs and persuading them to buy (advertising, sales force, pricing, channel selection)
Service: Post-sale support (installation, training, maintenance, repair, customer service)

Support activities (support the primary activities and each other):

Firm infrastructure: General management, planning, finance, accounting, legal, quality management, governance
Human resource management: Recruiting, training, developing, and compensating employees
Technology development: R&D, process improvement, product design, IT systems
Procurement: Purchasing inputs (raw materials, equipment, services) — the function, not the inputs themselves

Margin = the difference between total value created and the total cost of performing the value activities. Competitive advantage comes from performing activities more cheaply than competitors (cost advantage) or in a unique way that creates greater buyer value (differentiation advantage).

VRIO Framework

The VRIO framework (Barney, 1991) evaluates whether a resource or capability can provide sustained competitive advantage. Four questions must all be answered "yes":

Question	If "No"	If "Yes" (all four)
V — Valuable? Does it enable the firm to exploit opportunities or neutralise threats?	Competitive disadvantage	Sustained competitive advantage
R — Rare? Is it controlled by only a small number of firms?	Competitive parity (everyone has it)
I — Inimitable? Is it costly for competitors to obtain or develop? (due to: unique history, causal ambiguity — competitors don't know why it works, social complexity — culture, relationships)	Temporary competitive advantage (competitors will copy)
O — Organised? Is the firm organised to capture the value? (structure, processes, culture, incentives)	Competitive advantage exists but is not exploited

Example: A pharmaceutical company's patent portfolio: Valuable (generates revenue from exclusive drugs) ✓, Rare (unique patents) ✓, Inimitable (legally protected for 20 years) ✓, Organised (dedicated commercialisation team, sales force, regulatory expertise) ✓ → Sustained competitive advantage (until patents expire).

Core Competences and Dynamic Capabilities

Core competences (Prahalad and Hamel, 1990):

A core competence is a bundle of skills and technologies that enables a company to provide a particular benefit to customers. It represents the collective learning of the organisation. Three tests for a core competence:

Provides potential access to a wide variety of markets: The competence can be leveraged across multiple products and markets (not locked into one product)
Makes a significant contribution to the perceived customer benefits of the end product: Customers value what the competence delivers
Is difficult for competitors to imitate: The complex harmonisation of individual technologies and production skills is hard to replicate

Example: Honda's core competence in engine design allows it to compete in cars, motorcycles, lawnmowers, and generators. Apple's competence in user interface design spans phones, tablets, computers, watches, and services.

Dynamic capabilities (Teece, Pisano, Shuen, 1997):

The firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. In fast-moving industries, having great resources today is not enough — the organisation must be able to adapt, learn, and transform.

Sensing: Identifying and assessing opportunities and threats in the environment
Seizing: Mobilising resources to capture opportunities and address threats
Transforming: Continuously renewing, reconfiguring, and realigning resources and capabilities

Dynamic capabilities explain why some firms consistently outperform others in dynamic industries — they are better at adapting. Examples: Netflix pivoting from DVD rental to streaming to content production; Amazon expanding from books to cloud computing (AWS) to logistics.

SWOT Analysis — Synthesis

SWOT analysis synthesises the findings from external analysis (PESTEL, Five Forces) and internal analysis (resource audit, value chain, VRIO, core competences) into a single framework:

	Helpful (to achieving objectives)	Harmful (to achieving objectives)
Internal (within the organisation)	Strengths — internal capabilities that give competitive advantage	Weaknesses — internal limitations that hinder performance
External (in the environment)	Opportunities — external conditions the organisation can exploit	Threats — external conditions that could damage performance

Using SWOT for strategy formulation:

SO strategies: Use strengths to exploit opportunities (offensive — the ideal position)
WO strategies: Address weaknesses to exploit opportunities (developmental — invest to improve)
ST strategies: Use strengths to counter threats (defensive — leverage advantages)
WT strategies: Minimise weaknesses and avoid threats (survival — restructure, divest, or exit)

Effective SWOT practice: Be specific (not generic — "good brand" is vague; "brand recognition among 18-35 year olds in the UK ranked #2 in the sector" is useful). Prioritise the most significant factors. Link the analysis to strategic options. Do not simply list — explain the implications.

Examiner Focus

Porter's Five Forces is one of the most frequently tested models. For full marks: (1) apply ALL five forces to the specific scenario, (2) for each force, identify the key factors and assess whether the force is strong or weak, (3) give an OVERALL assessment of industry attractiveness, (4) link to strategic recommendations. Generic analysis scores poorly — use specific facts from the scenario.

Common Pitfall

Students often confuse the VRIO framework with Porter's generic strategies. VRIO evaluates RESOURCES (does this resource give sustained advantage?). Porter's generics are about STRATEGIC POSITIONING (how the firm competes in its market — cost, differentiation, focus). They answer different questions and should be used in different parts of the analysis.

Study Tip

For SWOT: the examiner wants you to be SPECIFIC and STRATEGIC. "Strong brand" is not enough — explain WHAT the brand means in the specific context and HOW it can be leveraged. Always link SWOT to strategic options: SO (use strengths to exploit opportunities), WO (invest to overcome weaknesses), ST (defend against threats), WT (exit or restructure).

Examiner Focus

Value chain analysis: don't just list the activities — explain where VALUE is created or where COSTS can be reduced in the specific scenario. The examiner wants you to identify which activities are sources of competitive advantage and which need improvement. Link to the firm's competitive strategy (cost leadership → focus on cost-efficient activities; differentiation → focus on value-creating activities).

Watch Out

PESTEL should NOT be a long list of every possible factor. Focus on the 3-4 factors that are MOST SIGNIFICANT and MOST LIKELY TO CHANGE for the specific organisation. Explain the IMPACT on the organisation, not just the existence of the factor. PESTEL is context-setting — it should inform the strategic analysis, not be the analysis itself.

Study Tip

Core competences vs resources: a resource is something the firm HAS (a factory, a patent, skilled employees). A competence is something the firm DOES well (design capability, supply chain management, customer service excellence). Core competences are the few truly distinctive capabilities that underpin competitive advantage across multiple markets.

Written Practice

Strategic Analysis: Applied Requirement

Prepare a focused written answer with clear workings and justified recommendations.

22 mins · 12 marks

A client has asked for a concise exam-style written response for a client or senior manager on strategic analysis. Use the key rules, calculations, risks, and professional judgement from this topic to structure your answer.

Answer Prompts

•Identify the issue and explain why it matters in the scenario.
•Apply the relevant technical rule, calculation, or framework.
•State the commercial, ethical, tax, reporting, or assurance implication.
•Conclude with a clear recommendation or exam-ready judgement.

Marking Focus

Application to facts rather than textbook recall
Clear structure and answer-first communication
Balanced judgement where there is uncertainty
Commercially sensible conclusion

Key Definitions

PESTEL

Framework for analysing the macro-environment: Political, Economic, Social, Technological, Environmental, Legal. Identifies external opportunities and threats beyond the firm's control.

Porter's Five Forces

Framework for analysing industry attractiveness: threat of new entrants, supplier power, buyer power, threat of substitutes, competitive rivalry. Stronger forces = lower average profitability.

Strategic group

A cluster of firms within an industry following similar strategies on key dimensions (price, quality, scope). Firms within the same group compete most directly.

Value chain (Porter)

Disaggregates the firm into primary activities (inbound logistics, operations, outbound logistics, marketing/sales, service) and support activities (infrastructure, HRM, technology development, procurement) to identify sources of value and advantage.

VRIO framework

Evaluates whether a resource provides sustained competitive advantage: Valuable, Rare, Inimitable, Organised to capture value. All four must be "yes" for sustained advantage.

Core competence (Prahalad & Hamel)

A bundle of skills/technologies providing customer benefit, applicable across markets, and difficult to imitate. Represents collective organisational learning. Examples: Honda engines, Apple design.

Dynamic capabilities

The firm's ability to integrate, build, and reconfigure competences in changing environments. Three elements: sensing (identify opportunities), seizing (mobilise resources), transforming (reconfigure and renew).

SWOT analysis

Synthesis framework: internal Strengths and Weaknesses + external Opportunities and Threats. Bridges internal and external analysis. Used to formulate SO, WO, ST, and WT strategies.

Barriers to entry

Obstacles that make it difficult for new firms to enter an industry: economies of scale, capital requirements, brand loyalty, switching costs, regulation, proprietary technology. High barriers reduce the threat of new entrants.

Competitive rivalry

The intensity of competition among existing firms. High when: many equal competitors, slow growth, high fixed costs, low differentiation, high exit barriers.

Key Formulas

Worked Examples

Practice Questions

Question 1 of 8

Porter's Five Forces model is used to analyse:

Question 2 of 8

In the VRIO framework, a resource that is Valuable and Rare but NOT Inimitable provides:

Question 3 of 8

The "T" in PESTEL stands for:

Question 4 of 8

Which of the following is a PRIMARY activity in Porter's value chain?

Question 5 of 8

Core competences (Prahalad and Hamel) must satisfy three tests:

Question 6 of 8

High competitive rivalry in an industry is most likely when:

Question 7 of 8

Dynamic capabilities are best described as:

Question 8 of 8

A SWOT analysis is most effective when:

Source and Version

Syllabus: ICAEW ACA Professional Level 2026 · Reviewed: 2026-05-04

ICAEW ACA syllabusLocal syllabus coverage review

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