The External Environment
A firm’s external environment consists of three interrelated sets of factors that play a principal
role in determining the opportunities, threats, and constraints that the firm faces. This chapter
describes the complex necessities involved in formulating strategies that optimize a firm’s market
opportunities. The remote environment comprises factors originating beyond, and usually
irrespective of, any single firm’s operating situation—economic, social, political, technological,
and ecological factors. Factors that more directly influence a firm’s prospects originate in the
environment of its industry, including entry barriers, competitive rivalry, the availability of
substitutes, and the bargaining power of buyers and suppliers. The operating environment
comprises factors that influence a firm’s immediate competitive situation—competitive position,
customer profiles, suppliers, creditors, and the labor market. These three sets of factors provide
many of the challenges that a particular firm faces in its attempts to attract or acquire needed
resources and to profitably market its goods and services. Environmental assessment is more
complicated for multinational corporations (MNCs) than for domestic firms because
multinationals must evaluate several environments simultaneously.
The design of business strategies is based on the conviction that a firm able to anticipate future
business conditions will improve its performance and profitability. Despite the uncertainty and
dynamic nature of the business environment, an assessment process that narrows, even if it does
not precisely define, future expectations is of substantial value to strategic managers.
Describe the three tiers of environmental factors that affect the performance
of a firm.
List and explain the five factors in the remote environment.
Give examples of the economic, social, political, technological, and
ecological influences on a business.
Explain the five forces model of industry analysis and give examples of each
Give examples of the influences of entry barriers, supplier power, buyer
power, substitute availability, and competitive rivalry on a business.
List and explain the five factors in the operating environment.
Give examples of the influences of competitors, creditors, customers, labor,
and direct suppliers on a business.
The Firm’s External Environment
A host of external factors influence a firm’s choice of direction and action and,
ultimately, its organizational structure and internal processes.