The External Environment
Chapter 2
The external environment:
Opportunities, threats, industry competition and competitor analysis
Knowledge objectives
1 Explain the importance of analysing and understanding the firm’s external environment
2 Define and describe the general environment and the industry environment
3 Discuss the four activities of the external environmental analysis process
4 Name and describe the general environment’s six segments
Knowledge objectives
5 Identify the five competitive forces and explain how they determine an industry’s profit potential
6 Define strategic groups and describe their influence on the firm
7 Describe what firms need to know about their competitors and the different methods
(including ethical standards) used to collect intelligence about them
The external environment
The general environment
The general environment is composed of dimensions in the broader society that influence an industry and the firms within it.
Six segments of environmental analysis are:
• demographic
• economic
• political/legal
• socio-cultural
• technological
• global.
The industry environment
The industry environment is the set of factors that directly influences a company, its competitive actions and competitive responses.
Five forces that influence the industry environment are:
• threat of new entrants
• power of suppliers
• power of buyers
• threat of product substitutes
• intensity of rivalry among competitors.
External environmental analysis General environment
Focused on the future
Industry environment
Focused on factors and conditions influencing a firm’s profitability within an industry
Competitor environment
Focused on predicting the dynamics of competitors’ actions, responses and intentions
External environmental analysis Opportunity
A condition in the general environment that, if exploited, helps a company to achieve strategic competitiveness. Threat
A condition in the general
The external environment:
Opportunities, threats, industry competition and competitor analysis
Knowledge objectives
1 Explain the importance of analysing and understanding the firm’s external environment
2 Define and describe the general environment and the industry environment
3 Discuss the four activities of the external environmental analysis process
4 Name and describe the general environment’s six segments
Knowledge objectives
5 Identify the five competitive forces and explain how they determine an industry’s profit potential
6 Define strategic groups and describe their influence on the firm
7 Describe what firms need to know about their competitors and the different methods
(including ethical standards) used to collect intelligence about them
The external environment
The general environment
The general environment is composed of dimensions in the broader society that influence an industry and the firms within it.
Six segments of environmental analysis are:
• demographic
• economic
• political/legal
• socio-cultural
• technological
• global.
The industry environment
The industry environment is the set of factors that directly influences a company, its competitive actions and competitive responses.
Five forces that influence the industry environment are:
• threat of new entrants
• power of suppliers
• power of buyers
• threat of product substitutes
• intensity of rivalry among competitors.
External environmental analysis General environment
Focused on the future
Industry environment
Focused on factors and conditions influencing a firm’s profitability within an industry
Competitor environment
Focused on predicting the dynamics of competitors’ actions, responses and intentions
External environmental analysis Opportunity
A condition in the general environment that, if exploited, helps a company to achieve strategic competitiveness. Threat
A condition in the general