Strategic Analysis and the External Environment
Domain 1 examines how SL3 candidates diagnose the external environment before committing to strategy. The exam tests whether you can move from environmental data to a defensible strategic implication, not simply list models.
Core rules and concepts
- PESTLE covers political, economic, social, technological, legal and environmental forces. State the direction, magnitude and probability of each factor, then link it to customers, costs or regulation.
- Porter's Five Forces assesses industry structure: rivalry, new entrants, substitutes, supplier power and buyer power. A strong force generally compresses industry profitability; evidence matters more than the label.
- Strategic groups are clusters of rivals with similar strategies. Competition is often fiercest within a group, and mobility barriers explain why firms cannot easily move between groups.
- Complete external analysis before SWOT; opportunities and threats belong to the environment, while strengths and weaknesses are internal.
Worked example
A Sri Lankan apparel exporter faces new EU due-diligence rules (PESTLE legal/political), rising energy costs (economic/environmental) and three buyers accounting for 60% of orders (Five Forces buyer power). Rivalry is high, substitutes are low, and new entrants face compliance and capital barriers. The strategic implication is not 'the industry is bad' but 'price-led competition is fragile': invest in traceability, diversify buyers and move into higher-value technical fabrics. Each conclusion follows from a named force and a measurable fact.
Traps that cost marks
Listing PESTLE factors without a 'so what' implication; calling a macro factor a Five Forces force; treating SWOT as the analysis rather than a summary; and declaring an industry attractive without segment-level evidence.