The Basic Principles of Competitive Strategy: External and Internal Diagnosis

The Strategic Approach

This section provides a review of the main tools used in strategic management. The following are five steps related to the strategic management process:

• 1.

  Gather and collect information;

• 2.

  Establish a strategic diagnosis;

• 3.

  Make recommendations;

• 4.

  Implement; and

• 5.

  Evaluate.

The objective here is to show how a strategic diagnosis (stage 2) could be conducted.

To simplify in the field of strategic management, two complementary approaches enable an explanation of the sustainable competitive advantage of a company, or alternatively its difficulties and its positioning problems in the market. An initial ‘external’ analysis of the environment calling on the use of various models including that of Porter (1980/1998, 1985) (the well-known “five forces” framework determining industry attractiveness), which stresses the fact that the company must adapt to its environment and find attractive and profitable sectors, i.e. sectors that are characterized by relatively weak competitive pressure (low rivalry, low threat of substitutes, low threat of entry, low buyer power and low supplier power). A second ‘internal’ analysis, based on “resources and competences” (Barney, 1991; Prahalad & Hamel, 1990; Wernerfelt, 1984) insists conversely on the capacity of a company to use and transform its environment. The most competitive company is the one which possesses the most advantageous resources and the competences necessary for the implementation and combination of these resources.

Figure 1 presents these two levels of analysis: external and internal. Both of them are based on several tools that are described in this chapter. We consider that concepts mentioned in bold are particularly relevant for a strategic analysis:

Figure 1.

The levels of strategic management analysis. Source: Elaborated by author.

• •

  At the External Level: The Five Force (+1) framework, industry value chain.

• •

  At the Internal Level: The RBV approach, firm value chain.