What Is the Relationship Between Competitive Strategy, External Environment and Internal Strategies?

Business strategy lays the foundation for everything a company does, from product development, to marketing ,to staffing. Strategy can be broken into a number of components, including competitive strategy and internal strategy. All business strategies revolve around a company's internal and external environments, as they are developed to take advantage of opportunities and mitigate threats arising from within or in the external environment. Understanding the relationship between competitive strategy, external environment and internal strategies can help you properly align your strategic decisions with opportunities and threats in the marketplace.

Competitive strategy aims to develop competitive advantages in the marketplace through brand or product differentiation. Competitive strategy develops core competencies that allow individual companies to excel in ways that appeal to consumers. When drafting your competitive strategy, begin with a thorough analysis of your major competitors' strategic positions. Look for gaps in the market not being served by your competitors to find strategic opportunities. For example, if you find that none of your competitors are serving the luxury segment of your market, that could present an opportunity to serve a profitable market niche. Or, if you find that customer service is a weakness throughout your industry, a service focus may be a winning competitive strategy.

For a business, the external environment consists of market forces outside the company that can exert notable effects on its revenue, costs, production processes or strategic options. These forces include competitors, regulatory agencies, suppliers, consumers and B2B customers. Events in or pressure from the external environment can require you to revisit your competitive strategies, in turn affecting the internal strategies you employ. If a competitor releases a major improvement in your product category, for example, you may be forced to alter your focus from a budget pricing strategy toward new product development and brand differentiation. If new regulations are put in place in your industry, you might need to alter internal production strategies to include new required safety equipment.

Internal strategies govern the way work is performed within an organization. Internal strategies can relate to organizational structure, performance management and the design of teams and departments. Internal strategy generally focuses on maximizing productivity and the quality of production output while minimizing operational costs. Draft your internal strategies in response to your external environment and competitive strategies to ensure that internal operations strengthen and contribute to your competitive advantage.

A number of tools exist to simplify the process of aligning factors in the external environment with your company's competitive and internal strategies. A SWOT analysis, for example, charts a company's internal strengths and weaknesses along with threats and opportunities in the external environment. A gap analysis reveals the difference between a company's current strategic position and its current goals, as another example. Using such tools can be useful not only for brainstorming new strategic options, but also for presenting such options to board members, managers and other stakeholders involved in strategic decision-making.