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The External Environment

Chapter Summary

A firm's external environment consists of three interrelated sets of factors that play a principal role in determining the opportunities, threats, and constraints that the firm faces. The remote environment comprises factors originating beyond, and usually irrespective of, any single firm's operating situation-economic, social, political, technological, and ecological factors. Factors that more directly influence a firm's prospects originate in the environment of its industry, including entry barriers, competitor rivalry, the availability of substitutes, and the bargaining power of buyers and suppliers. The operating environment comprises factors that influence a firm's immediate competitive situation-competitive position, customer profiles, suppliers, creditors, and the labor market. These three sets of factors provide many of the challenges that a particular firm faces in its attempts to attract or acquire needed resources and to profitably market its goods and services. Environmental assessment is more complicated for multinational corporations (MNCs) than for domestic firms because multinationals must evaluate several environments simultaneously.

Thus, the design of business strategies is based on the conviction that a firm able to anticipate future business conditions will improve its performance and profitability. Despite the uncertainty and dynamic nature of the business environment, an assessment process that narrows, even if it does not precisely define, future expectations is of substantial value to strategic managers.

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