Final answer:
External analysis helps firms understand their competitive environment and determine strategic positioning. It outlines what firms might, can, and should do, but not necessarily what they will do. It guides strategic decision-making through assessment of market conditions, resources, capabilities, costs, and benefits.
Step-by-step explanation:
External analysis is a critical aspect of strategic management, enabling a firm to determine its competitive environment and strategically position itself for success. One of the fundamental aspects of external analysis involves evaluating market conditions, such as what competitors are doing—whether they are expanding or contracting their output—and making decisions based on these observations.
Furthermore, external analysis helps a firm comprehend not only what it might do but also what it can do, based on resources and capabilities. Additionally, external analysis can suggest what a firm should do when it comes to market opportunities and threats, by weighing things like costs, benefits, and the overall competitive landscape.