Through an integrated understanding of the external and internal environments, firms gain the information they need to understand the present and predict the future.
The general environment is composed of elements in the broader society that influence an industry and the firms within it. These elements can be grouped into six environmental segments: demographic, economic, political/legal, sociocultural, technological, and global. Firms cannot directly control the general environment’s segments and elements. Accordingly, successful companies gather the types and amounts of data and information that are required to understand each segment and its implications so that appropriate strategies can be selected and used.
The industry environment is the set of factors—the threat of new entrants, suppliers, buyers, product substitutes, and the intensity of rivalry among compititors—that directly influences a firm and its competitive actions and responses. In total, the interactions among these five factors determine an industry’s profit potential. The challenge is to locate a position within an industry where a firm can favorably influence those factors or where it can successfully defend against their influence. The greater a firm’s capacity to favorably influence its industry environment, the greater is the likelihood that the firm will earn above-average returns.
How companies gather and interpret information about their competitors is called competitor analysis. Understanding the firm’s compititor environment complements the insights provided by studying the general and industry environments.
In combination, theresults of the three analyses that are used to understand the external environment influence the development of the firm’s strategic intent, strategic mission, and strategic actions. Analysis of the general environment is focused on the future; analysis of the industry environment is focused on understanding the factors and conditions influencing a firm’s profitability; and analysis of competitors is focused on predicting the dynamics of compititors’ actions, responses, and intentions. Although we discuss each analysis separately, performance improves when the firm integrates the insights gained analysis of the general environment, the industry environment, and the compititor environment.
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