External analysis: from macro trends to a ranked list of opportunities and threats

An external analysis often ends as a long list of trends: digitalisation, ageing, sustainability, interest rates. All true, and none of it helps you choose. The test of a good external analysis is simpler: does it tell you which few developments outside your business will change your results, and in which direction? That is what this step should deliver.

You start from the strategic question you set in step 1 and work from far away to close by. The result is a ranked list of opportunities and threats that feeds straight into the SWOT. The running example is Norvane Building Services, the fictitious building services firm that is weighing new-build projects against maintenance and retrofit work.

Why the outside world weighs so heavily

In McKinsey's research on long-term company performance, about 50 percent of a company's position on the performance curve was driven by its industry (source: McKinsey, February 2018). Michael Porter made the same point from another angle in Harvard Business Review (1979, and revised in 2008): the structure of an industry sets how much profit is available, and strategy is about finding a position where you can best defend yourself against the forces or bend them in your favour. You cannot change most of what happens outside, but you can choose where you stand.

Four layers of an external analysis

The macro environment: what to look for

The PEST family of checklists goes back to Francis Aguilar's work on scanning the business environment, published in 1967. Use it to find developments, then ask for each one what it could mean for your strategic question. The table shows the kind of shifts that matter for many businesses; your own list will be shorter and more specific.

Several of these developments are worked out in strategic themes, such as AI, labour shortages, supply chain risk and energy. Where the outcome is genuinely uncertain, do not force a forecast: note it as an uncertainty and explore it with scenarios.

Your industry: the five forces and what works through them

The five forces are rivalry between existing competitors, the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants and the threat of substitutes. Porter treats government and complementary products not as extra forces but as factors that work through the five. A subsidy for heat pumps, for example, raises demand and may attract new entrants at the same time.

• Define the industry carefully: too broad and the analysis says nothing; too narrow and you miss the substitute that takes your customers. Porter warns that managers often see competition only among today's direct rivals.
• Analyse, do not list: for each force, say whether it is getting stronger or weaker and what that does to prices and margins.
• Separate the temporary from the structural: a one-year price spike is not the same as a lasting shift in supplier power.

Customers and competitors: look at who is not there yet

Look at three groups of competitors: direct rivals offering the same thing, indirect rivals solving the same customer problem in another way, and potential entrants from neighbouring industries or online platforms. The third group is the one most often missed. For customers, ask what they are trying to get done, what is changing in their own business and which channels they now prefer.

For Norvane, the most telling customer conversations were with the asset managers of two large landlords. Both said their boards had approved multi-year programmes to upgrade heating and ventilation in existing homes, and that their biggest worry was finding contractors with enough qualified people.

From findings to a ranked list of opportunities and threats

Score each finding on impact on your strategic question and on likelihood, both from one to five, and multiply. Agree a cut-off in advance. Only what passes goes on to the SWOT; the rest goes on a watch list that you check at each review.

Agree what the scores mean before you start, or everyone uses their own scale. A practical definition: a five for impact means the finding could change your answer to the strategic question, a three means it moves results but not the choice, and a one means it hardly matters. A five for likelihood means it is already happening, a three that it is plausible within your horizon, and a one that it is a long shot. Score individually first, then discuss the largest differences: they usually show where the team holds different assumptions.

Fictitious Firmfocus example. Cut-off for the SWOT: a score of 12 or more.

Note how the grid finding is both a threat and an opportunity. That is common: the same development can hurt your clients and create work for you. Record it once, with both sides, rather than splitting it.

Where to find the data

• Official statistics: your national statistical office, Eurostat, the OECD and the World Bank for demand, prices, wages and demographics.
• Industry figures: turnover, margins and cost structure of your sector, such as the Firmfocus industry figures for EU sectors.
• Regulators and trade associations: announced rules, consultations and sector outlooks.
• Customers and suppliers: short interviews often tell you more than a report, and earlier.
• Competitors: websites, annual reports and public filings, price lists, job advertisements and what customers say about them.

Small business or larger organisation

Pitfalls in the external analysis

• Trends without consequences: "AI is growing" is not a finding; "AI lets clients plan maintenance themselves" is.
• Only today's competitors: the entrant from a neighbouring industry is missing from most lists.
• No ranking: twenty unranked factors give the SWOT nothing to work with.
• Opportunities that are really actions: "launch a webshop" is a possible response, not an external opportunity.

Next comes the inside of the business: step 3, the internal analysis, tests which of your strengths and weaknesses matter for the factors on your list. Where this step fits is shown in the strategy process in five steps; other strategy topics are collected under Strategy.