External Environment Analysis

Topics: Strategic management, Competition, Competitor analysis Pages: 6 (1767 words) Published: July 8, 2013

At the end of this chapter, the student should be able to:
1. Understand the processes for an environmentally conscious organization. 2. Know the importance of SWOT analysis in analyzing both external and internal environment. 3. Understand the different segments of the external environment known as the general environment. 4. To find out how the strength of the company’s competitive forces are congruent with the industry’s through the five-forces model of industry competition. 5. To understand the relevance of benchmarking in evaluating company’s performance as against competitors.


Companies must be responsive to the external business environment. Knowledge about the business environment is essential to detect key trends and events. Successful managers must recognize opportunities and threats in their firm’s external environment. They must be aware of what is going on outside their company. To become environmentally aware, managers must first realize that many external factors are uncontrollable like recession, government interference, actions of competitors and other factors.

1. Environmental scanning. Environmental scanning involves surveillance of a firm’s external environment to predict environmental changes and detect changes already underway. Successful environmental scanning alerts the organization to critical trends and events before the changes have developed a discernible pattern and before competitors recognize them. 2. Environmental monitoring. Environmental monitoring tracks the evolution of environmental trends, sequences of events, or streams of activities. They may be trends that the firm came across by accident or ones that brought to its attention from outside the organization. 3. Competitive intelligence. Competitive intelligence helps firms define and understand their industry and identify rivals’ strengths and weaknesses. This includes the intelligence gathering associated with collecting data on competitors and interpreting such data. 4. Environmental forecasting. Environmental forecasting involves the development of plausible projections about the direction, scope, speed, and intensity of environmental change. Its purpose is to predict change.

SWOT (strengths, weaknesses, opportunities, and threats) analysis. Strengths and weaknesses refer to internal resources. Strengths might be like skilled management, profitable position, etc. Weaknesses might be absence of reliable suppliers and lack of skilled workers.

Opportunities and threats occurs in the macroenvironment and the competitive environment. These could be the factors either in the general environment of in the competitive environment. SWOT analysis is a framework that is used to consider both internal and external factors simultaneously. It is also used to raise awareness about the role of strategy in creating a match between the environmental conditions and the firm’s internal strengths and weaknesses.

The general environment is the factors and conditions (such as economic, legal, political, and social circumstances) that generally affect everyone in an industry or market in more or less similar manner. These factors and conditions have dramatic effects on firm’s strategy.

Segments of the General Environment
1. Legal. Some determinants in the legal segment are taxation laws, antitrust laws, deregulation philosophies, labor laws, educational philosophies, etc. 2. Demographic. It includes population size, age structure, geographic distribution, ethnic mix, income distribution, etc. 3. Economic. These are inflation rates, interest rates, trade deficits or surpluses, budget deficits or surpluses, personal savings rate, business savings rates, GNP, GDP, PCI, etc. 4. Sociocultural. Dependence on online social networks, workforce diversity, more women in the workforce, attitudes about...
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