The External Environment Analysis

The External Environment Analysis
I. Definitions
- A firm’s EXTERNAL ENVIRONMENT is broken down into three parts:
 General
 Industry
 Competitor
- A firm’s strategic actions are influenced by the conditions in all three parts.
- General Environment
 Dimensions in the broader society that influence an industry and the firms within it Macro
- Industry Environment
 Set of factors that directly influences a firm and its competitive actions and response
- Competitor Environment
 Focuses on each company against which a firm directly competes Micro

II. The external environment
- A firm’s external environment creates:
 OPPORTUNITIES e.g., the opportunity for BP to enter other global markets, and
 THREATS e.g., the possibility that additional regulations in its markets will reduce
opportunities for BP to extract oil and gas
 Collectively, opportunities and threats affect a firm’s strategic actions
Matching
 External environement understanding

 Internal environement knowkedge
 Vision, mission, and strategy
1. General
- The General Environment is grouped into seven environmental segments:
1. Social/ Demographic/Socioculture
2. Technological
3. Economic STEEP
4. Environment/Physical/Global
5. Political/Legal
-To successfully deal with uncertainty in the external environment and achieve strategic
competitiveness, firms must be aware of and understand these segments. The external
environment General
- Firms cannot directly CONTROL the general environment’s segments.
- However, these segments influence the actions that firms take.
- Successful firms learn how to gather the information needed to understand all segments and
their implications for selecting and implementing the firm’s strategies.
2. General elements
a. The demographic
- Demographic segments are commonly analyzed on a global basis because of their potential
effects across countries’ borders and because many firms compete in global markets.
- Demographic Segment
 Population size
 Age structure
 Geographic distribution
 Ethnic mix
 Income distribution
b. The socioculture
- The sociocultural segment is concerned with a society’s attitudes and cultural values. Because
attitudes and values form the cornerstone of a society, they often drive demographic,
economic, political/legal, and technological conditions and changes.
- Sociocultural Segment
 Women in the workforce

 Workforce
 Diversity attitudes about the quality of work life
 Shifts in work and career preferences
 Shifts in product and service preference characteristics
c. The technological
Technological changes occur through new products, processes, and materials. The technological
segment includes the activities involved in creating new knowledge and translating that
knowledge into new outputs, products, processes, and materials. Given the rapid pace of
technological change and risk of disruption, it is vital for firms to study this segment.
- Technological Segment
 Product innovations
 New communication technologies
 Applications of knowledge
 Focus of private and government-supported R&D expenditures
d. The economic
- This segment refers to the nature and direction of the economy in which a firm competes or
may compete. Firms generally seek to compete in relatively stable economies with strong
growth potential. With globalization and the interconnectedness of nations, firms must scan,
monitor, forecast, and assess the health of their host nation and the health of the economies
outside their host nation.
- Economic Segment
 Inflation rates
 Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product
e. The physical environment
- Concerned with trends oriented to sustaining the world’s physical environment, firms
recognize that ecological, social, and economic systems interactively influence what happens in
this particular segment. This segment refers to potential and actual changes in the physical
environment and business practices that are intended to positively respond to and deal with
those changes.
- Physical Environment Segment

• Energy consumption
• Practices used to develop energy sources
• Renewable energy efforts
• Minimizing a firm’s environmental footprint
• Availability of water as a resource
• Producing environmentally friendly products
• Reacting to natural or man-made disasters
f. The global
- Markets and consumers are more global. This segment includes relevant new global markets,
existing markets that are changing, important international political events, and critical cultural
and institutional characteristics of global markets.
- Global Segment
• Important political events

• Critical global markets
• Newly industrialized countries
• Different cultural and institutional attributes
g. The political/legal
- This segment represents how organizations and governments mutually try to influence each
other, and how firms try to understand these influences (current and projected) on their
strategic actions.
- Political/Legal Segment
• Antitrust laws
• Taxation laws
• Deregulation philosophies
• Labor training laws
• Educational philosophies and policies
III. External environment analysis
- External environments are:
• Turbulent
• Complex
• Global
• Uncertain
• Ambiguous
• Incomplete
- Firms engage in external environmental analysis to better understand and cope with their
environments.
- This analysis has four parts: scanning, monitoring, forecasting, and assessing
• Scanning: Identifying early signals of environmental changes and trends

• Monitoring: Detecting meaning through ongoing observations of environmental
changes and trends
• Forecasting: Developing projections of anticipated outcomes based on monitored
changes and trends
• Assessing: Determining the timing and importance of environmental changes and
trends for firms’ strategies and management
- Identifying opportunities and threats is an important objective of studying the general

environment.
• OPPORTUNITY is a condition in the general environment that if exploited effectively,

helps a company achieve strategic competitiveness.
EXAMPLE: Procter & Gamble (P&G) is reorienting beauty products to better serve both
men and women
• THREAT is a condition in the general environment that may hinder a company’s efforts
to achieve strategic competitiveness.
EXAMPLE: Microsoft is experiencing a severe external threat as smartphones are
expected to surpass personal computer (PC) sales in the near future.
- Firms use several sources to analyze the general environment:
•  trade publications
•  newspapers
•  business publications
•  academic research
•  public polls
•  trade shows
•  suppliers
•  customers
•  employees
- People in boundary-spanning positions can obtain a great deal of this type of information.
• Examples: salespersons, purchasing managers, public relations directors, and customer
service representatives, each of whom interacts with external constituents
- Scanning: identify early signals of potential changes in the general environment and detect
changes that are already underway
- Monitoring: analysts observe MEANINGFUL environmental changes to see if an important

trend is emerging from among those spotted through scanning
- Forecasting: feasibility projections developed for what might happen, and how quickly, as a
result of the changes and trends detected through scanning and monitoring, both of which
focus on events at a point in time
- Assessing: determining the timing and significance of the effects of environmental trends
that have been identified; specifying the implications of the understanding gathered in the
previous stages

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The External Environment Analysis

- A firm’s EXTERNAL ENVIRONMENT is broken down into three parts:

 Focuses on each company against which a firm directly competes Micro

- A firm’s external environment creates:

 Collectively, opportunities and threats affect a firm’s strategic actions

 External environement understanding

- The General Environment is grouped into seven environmental segments:

- Firms cannot directly CONTROL the general environment’s segments.

- However, these segments influence the actions that firms take.

 Women in the workforce

e. The physical environment

- Physical Environment Segment

• Important political events

III. External environment analysis

- External environments are:

• Scanning: Identifying early signals of environmental changes and trends

- Identifying opportunities and threats is an important objective of studying the general

• OPPORTUNITY is a condition in the general environment that if exploited effectively,

- Firms use several sources to analyze the general environment:

- Monitoring: analysts observe MEANINGFUL environmental changes to see if an important

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