The External Environment: Opportunities, Threats, Industry Competition,
and Competitor Analysis
Given that the external environment will continue to change—and that change may be
unpredictable in terms of timing and strength—a firm’s management is challenged to be aware of,
understand the implications of, and identify patterns represented in these changes by taking
actions to improve the firm’s competitive position, improve operational efficiency, and to be
effective global competitors.
External environmental factors—like the war and political unrest, variations in the strength of national
economies, and new technologies—affects firm growth and profitability in the U.S. and beyond.
Environmental conditions in the current global economy differ from those previously faced by firms:
Technological advances require more timely and effective competitive actions and responses.
Rapid sociological changes abroad affect labor practices and product demand of diverse consumers.
Governmental policies and laws affect where and how firms may choose to compete.
Changes to nations’ financial regulatory systems.
Understanding the external environment helps to build the firm’s base of knowledge and information
which can (1) help to build new capabilities, (2) buffer the firm from environmental impacts, and (3)
build bridges to influential stakeholders.
The firm’s understanding of the external environment is matched with knowledge about its
internal environment (discussed in Chapter 3) to form its vision, to develop its mission, and to
take strategic actions that result in strategic competitiveness and above-average returns.
THE GENERAL, INDUSTRY, AND COMPETITOR ENVIRONMENTS
is composed of elements in the broader society that can indirectly influence an
industry and the firms within the industry.
But firms cannot directly control the general environment’s
segments and elements.
The General Environment: Segments and Elements
The six segments of the general environment: demographic, economic, political/legal,
sociocultural, technological, global, and physical.
is the constellation of factors—threat of new entrants, suppliers, buyers,
product substitutes, and the intensity of rivalry among competitors—that directly influence a firm and its
competitive decisions and responses.
represents the firm’s understanding of its current competitors.
will complement information and insights derived from investigating the general and industry
The following are important distinctions to make regarding different external analyses:
Analysis of the general environment focuses on the future.
Industry analysis focuses on factors and conditions influencing firm profitability within its industry.