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1. Why is it important for a firm to study and understand the external environment?
The external environment influences the firm’s strategic options as well as the decisions made in light of
them. The firm’s understanding of the external environment is especially useful when it is matched with
knowledge about its internal environment. Matching the conditions of the two environments is the
foundation the firm needs to form its vision and mission, and to take strategic actions in the pursuit of
strategic competitiveness and above-average returns. The importance of understanding the external
environment is further underscored by the fact that the environmental conditions facing firms in the global
economy of the 21st century differ from those firms faced previously. For example, technological changes
and the explosion in information gathering and processing capabilities demand more timely and effective
competitive actions and responses. The rapid sociological changes occurring in many countries affect
labor practices and the nature of products demanded by increasingly diverse consumers. Governmental
policies and laws affect where and how firms choose to compete. Competitive advantage goes to those
firms who know their external environment and plan their strategies so they are relevant to these
conditions.
2. What are the differences between the general environment and the industry environment? Why
are these differences important?
The general environment represents those elements in the broader society that can influence all (or most)
industries and the firms that compete in those industries; it represents elements or segments that firms
cannot directly control. The general environment is composed of the following segments: demographic,
economic, political/legal, sociocultural, technological, and global.
The industry environment is the constellation of factors that directly influences a firm and its competitive
actions and responses. Firms are influenced by these factors and should attempt to establish a position in
the industry that enables the firm to favorably influence the factors or to successfully defend against the
factors’ influence. These factors include the threat of new entrants, bargaining power of suppliers,
bargaining power of buyers, threat from substitute products, and intensity of rivalry among competitors.
3. What is the external environmental analysis process (four parts)? What does the firm want to learn
when using this process?
The environmental analysis process represents an organized attempt by the firm to better understand
turbulent, complex, and global environments. This is achieved by scanning (studying all segments of the
general environment to identify existing or potential changes), monitoring (observing the pattern of
changes over time in an attempt to detect meaning or identify trends), forecasting (developing feasible
projections of what might happen, and how quickly, as a result of changes and trends identified from
scanning and monitoring activities) and assessing (determining the timing and significance of
environmental changes and trends on the strategic management of the firm). Stated differently, this
analysis should examine and process external data on a continuous basis.
Chapter 2: The External Environment
An important objective of the environmental analysis process is to identify potential threats (conditions
that may hinder the firm’s efforts to achieve strategic competitiveness) and opportunities (that may assist
or help the firm in its efforts to achieve strategic competitiveness).
4. What are the seven segments of the general environment? Explain the differences among them.
The demographic segment is concerned with characteristics of the population or society that makes up
the general environment. Characteristics of interest are size, age, structure, geographic distribution, ethnic
mix, and income distribution.
The economic segment refers to the nature and direction of the economy in which a firm competes or
may compete in the future. Important characteristics include inflation and interest rates, trade deficits (or
surpluses), budget deficits (or surpluses), individual and business savings and investment rates, and gross
domestic product.
The political/legal segment is the arena in which organizations and interest groups compete for attention,
resources, and a voice in overseeing the body of laws and regulations guiding interactions between
nations. In other words, this segment is concerned with how firms and other organizations attempt to
influence government and how governmental entities in turn influence them.
The sociocultural segment is concerned with the social attitudes and cultural values of different societies.
The technological segment is made up of the institutions and activities involved with creating new
