The competitiveness of Small and Medium Enterprises (SMEs) in Indonesia is still very low and vulnerable compared to increasingly uncertain business environment dynamics. Changing conditions require SMEs carry out continuous and systematic analysis of the external environment, so that owners who carry out strategic planning get information through various sources in the external environment. This is done to maintain a competitive advantage and as an effort to realize unexpected opportunities and progress. This study aims to: (1) measure the impact of external environment on differentiation strategy in SMEs in Central Java; (2) measure the impact of external environment on competitive advantage in SMEs in Central Java; (3) measure the impact of differentiation strategy on competitive advantage in SMEs in Central Java. The type of research used in this study is causal research. The method used in this research is quantitative. The population that will be used and examined in this study is all SMEs in Central Java, while the samples in this study were 180 SMEs in Central Java with a multivariate type sample size. Data collection technique was conducted using a questionnaire. This study uses Partial Least Square (PLS) for its analysis technique. The results in this study indicate that: (1) External Environmental has a significant effect on Differentiation Strategy; (2) External Environmental has a significant impact on Competitive Advantage. And (3) Differentiation Strategy has a significant effect on Competitive Advantage.