Module 3

Strategy Formulation
Analyzing Internal and External Environments
to Generate Strategic Options
• Analyzing internal and external environments is essential for generating effective
strategic options.
• Internally, organizations assess strengths, weaknesses, resources, and capabilities
using tools like SWOT or VRIO to understand what they can leverage or improve.
• Externally, they study market trends, competition, technology, and regulatory
changes through frameworks like PESTLE and Porter’s Five Forces.
• This dual analysis helps in identifying opportunities for growth and threats to
mitigate.
• Strategic options are then developed by aligning internal strengths with external
opportunities while addressing weaknesses and threats. This process ensures that
strategies are realistic, competitive, and adaptable to changing environments,
enhancing long-term organizational success.
 What is SWOT & VRIO?
• SWOT
• Identifies a firm's internal Strengths and Weaknesses, and external Opportunities
and Threats.
• It helps organizations assess strategic positioning, capitalize on advantages, address
limitations, exploit opportunities, and prepare for risks.
• This tool supports informed decision-making, goal setting, and crafting competitive
strategies aligned with internal capabilities and market dynamics.
• VRIO
• Evaluates a firm's resources and capabilities to determine competitive advantage.
• It stands for Value, Rarity, Imitability, and Organization.
• A resource that is valuable, rare, hard to imitate, and well-organized gives a
sustainable advantage, guiding strategic decisions to strengthen long-term
performance and market position.
 What is PESTLE & Porter’s Five Forces?
• PESTLE
• PESTLE analysis examines external factors affecting an organization: Political,
Economic, Social, Technological, Legal, and Environmental.
• It helps identify opportunities and threats in the macro-environment.
• Businesses use PESTLE to anticipate changes, adapt strategies, ensure compliance,
and remain competitive in dynamic markets influenced by global and local trends.
• Porter’s Five Forces
• A strategic analysis tool that assesses industry attractiveness and competitive
intensity.
• The five forces are: competitive rivalry, threat of new entrants, threat of
substitutes, bargaining power of buyers, and bargaining power of suppliers.
• It helps businesses understand market dynamics and develop strategies to improve
profitability.
Analyzing Internal and External Environments
to Generate Organizational Goals & Mission
• Analyzing internal and external environments is crucial for defining clear
organizational goals and a compelling mission.
• Internally, factors like resources, capabilities, culture, and structure are
assessed to understand strengths and weaknesses.
• Externally, tools like SWOT or PESTLE identify opportunities and threats
from markets, competitors, and trends.
• This dual analysis ensures goals are realistic, aligned with capabilities, and
responsive to market demands.
• The mission statement, grounded in this understanding, reflects the
organization's core purpose, values, and strategic direction.
• By aligning internal strengths with external opportunities, organizations can
set focused, achievable goals that drive sustainable growth and competitive
advantage.
Analyzing Internal and External Environments to
Generate Social Responsibility
• Internally, evaluating values, culture, and resources helps identify how
existing capabilities can support ethical practices and sustainability
initiatives.
• Externally, analyzing societal expectations, regulatory frameworks, and
stakeholder interests reveals pressing social issues and areas of potential
impact.
• Tools like SWOT and PESTLE assist in identifying strengths and opportunities
for responsible action.
• By integrating these insights, organizations can craft strategies that not only
fulfill business objectives but also address community needs,
environmental concerns, and ethical standards, fostering long-term trust,
goodwill, and socially responsible growth.
Case Study – The Tata Group
• Internal Analysis: Tata Group is identified by its strong brand reputation, financial
resources, and values rooted in philanthropy (e.g., Tata Trusts). This internal
strength guided its commitment to corporate social responsibility (CSR), especially
in areas like education, healthcare, and rural development.
• External Analysis: Externally, Tata analyzed India's socio-economic
challenges—rural poverty, limited access to quality education, and environmental
degradation. Through PESTLE, they also noted regulatory encouragement for CSR
and rising public expectations for corporate accountability.
• Strategic Action: Combining internal values with external needs, Tata
implemented initiatives like Tata STRIVE (skill development for youth), solar
microgrids in villages, and scholarships for underprivileged students. These efforts
demonstrate how environmental analysis led to socially responsible strategies
aligned with both company strengths and societal expectations.
• Thus, by systematically analyzing its internal capabilities and external societal
challenges, Tata Group not only enhanced its social impact but also strengthened
stakeholder trust and long-term sustainability.
 Applying the VRIO Framework: Apple’s
Ecosystem
• Value: Is the resource/capability valuable?
• Apple's ecosystem connects its hardware (iPhones, Macs, iPads), software
(macOS, iOS), and services (iCloud, Apple Music, App Store).
• This ecosystem adds value by offering seamless integration and a superior
user experience.
• Valuable? Yes: It enhances customer loyalty and drives repeat purchases.
• Rarity
• Is the resource/capability rare among competitors?
• While other companies like Google and Samsung have tried, none has
replicated the depth and consistency of Apple's ecosystem across hardware
and services.
• Rare? Yes Few, if any, rivals offer this level of seamless integration.
 Applying the VRIO Framework: Apple’s
Ecosystem
• Imitability
• Is the resource/capability costly or difficult to imitate?
• Apple's ecosystem has taken years to build — it includes proprietary hardware, custom
chips (like M1, M2), tightly controlled app policies, and strong brand loyalty.
• Competitors would find it extremely difficult and expensive to duplicate this system.
• Costly to Imitate? Yes…The blend of tech, brand, and integration is uniquely Apple.
• Organization
• Is the firm organized to exploit this resource/capability?
• Apple is highly organized to leverage its ecosystem — from R&D to marketing to support. Its
vertical integration (designing both hardware and software) supports this capability fully.
• Well Organized? Apple aligns its structure and strategy to fully exploit this advantage.
• Strategic Advantage Outcome -Apple’s ecosystem satisfies all four VRIO criteria
• Sustained Competitive Advantage
• It creates switching costs for users, drives customer retention, and allows Apple to charge a
premium — all contributing to long-term strategic success.
 How Internal SWOT Analysis Is Carried Out (S &W)
• Assess Core Strengths
• Identify resources, capabilities, and achievements that offer advantage:
• Strong brand identity
• Skilled workforce
• Patented technologies
• Efficient supply chains
• High customer satisfaction
• Identify Internal Weaknesses
• Pinpoint areas of underperformance:
• High employee turnover
• Outdated technology
• Poor financial management
• Weak marketing reach
• Limited innovation
 How Internal SWOT Analysis Is Carried Out
• Gather Internal Data
• Conduct internal audits, employee surveys, customer feedback
• Analyze financial reports, process efficiency, KPIs
• Map Strengths to Opportunities
• Use strengths to capitalize on external opportunities
• Example: A company with a strong R&D team can innovate faster in emerging
markets
• Mitigate Weaknesses Against Threats
• Fix internal weaknesses to defend against external threats
• Example: Strengthening cybersecurity systems to counter rising data breach
risks
 External business environment analysis
using SWOT analysis Tesla, Inc.
• Opportunities (External):
• Global shift toward clean energy: Growing government incentives and public demand for
electric vehicles (EVs) due to climate change concerns provide Tesla with expanding market
opportunities.
• Expansion into emerging markets: Countries like India, Brazil, and Southeast Asian nations
are investing in EV infrastructure—new growth avenues for Tesla.
• Autonomous driving and AI: Advancements in self-driving technology open up new
business models (e.g., Tesla Robo-taxi network).
• Energy storage and solar products: Increased interest in off-grid energy solutions fuels
demand for Tesla Powerwall and Solar Roof.
• Threats (External):
• Intense competition: Established automakers (e.g., Ford, GM, Toyota) and new EV startups
(e.g., Rivian, Lucid Motors, BYD) are launching competitive EV models.
• Regulatory risks: Shifting government policies, safety regulations, or EV subsidies being
reduced or removed could impact profitability.
• Supply chain disruptions: Global shortages in lithium, semiconductors, and other essential
components can delay production and increase costs.
• Market volatility and geopolitical risks: Trade tensions, tariffs, and unstable international
markets (e.g., China-U.S. relations) may affect Tesla's global operations.