"Google, on the other hand, ranked the site well for the keyword supported by external links to the site and didn’t rank at all for the keyword targeted by the sites content." Google care about your inner site structure and anchor text in the inner pages links in your own website, and care as well for the content of your website pages and if your site is not related it won't rank for the targeted keyword or at lease wont last for good.
I think Google is influenced by "quality links" which are defined by "Google own algorithm" more than just a link. Your content quality is also the most important key, plus your internal linking structure too.
I think google also care about the content very much. The more content you add, the better the site ranks in google.
I also disagree with you, google care less about external link moreover if your site content is not related to the external site you site may be penalized by google and your site may go down in the SERP
Google cares about external links that are relevant to your content. Anchor text is important when getting back links
I just optimize for Google. The rest will follow automatically when you do that. Maybe not as quick, but that doesn't really matter to me.
"External links pointing to your site" is just part of the thousands of criteria that they use for SERP. It could not be taken as the sole contributor. There are other factors like use of keywords, distribution, internal link structure, and many more....
internal link structure is true important. link algorithm [pr] is the early algorithm used by google, they will never give it up. The evidence is that google has a link "report paid links" at the dashborad of google webmaster tools.