Go to \FE Legendary Heroes\data\English\Scenarios and open the file LH_Scenario.XML, then find the lines which begin with <AIDifficulty>. To make things harder, you'll want to edit the entries for EmpireOfKraxis, EmpireOfResoln, EmpireOfYithril, EmpireOfMagnar, and EmpireOfYithril2 so that the AI difficulty is higher. You could also edit the Kingdom AI difficulty entries so that the Kingdom AIs are weaker.
You could also edit the faction relationships entries in the same file to change your allies from team members to neutrals/allies/hostiles/etc.
Other than that, you could go into the \LHScenario folder, found in the above location, and edit the faction file to increase the power of the Yithril Invasion faction, or edit the Kingdom Champions to become weaker or the Empire Champions/Sovereigns to become stronger (some of these are found in the LHScenario_Units.XML file, others are probably as defined in the normal game files). You could also try editing the map file to make your starting location more challenging, or the enemy starting locations better.
