External Environment analysis refers to the study of the external environment within which business operates. It means analyzing the external forces which affect the functioning of business either directly or indirectly. Proper study of the external environment is important in shaping a better future for business and attaining desired growth. It helps in finding out the opportunities or threats available for a business that may lead to profitability and growth. Show
External environment analysis helps management in framing proper business strategies as per the requirements thereby keeping business ahead of the competition. The external environment of business is categorized into two categories: Microenvironment and the macro environment. Micro external environment includes all those factors that directly affect the operations of business like suppliers, competitors, customers, market intermediaries, public, etc. Whereas, the macro external environment consists of such factors that are general in nature and affects the whole industry but not a particular company. The macro external environment includes the political, social, economic, technological and demographic environments. Tools and Techniques of External environment analysis can be well-understood form points given below: Methods and Techniques of External Environment Analysis SWOT AnalysisSWOT analysis means analyzing the strength, weaknesses, opportunities, and threats of the business environment. Strengths and weaknesses are internal factors whereas opportunities and threats are external factors affecting the performance of the business. SWOT analysis is an efficient technique in understanding both internal and external environments of a business which thereby helps in framing better strategies. Porter’s Five Forces ModelThis technique analyses the five forces that affect business. Porter’s five forces model focuses on potential entrants, buyers, suppliers, existing competitors and alternatives products or services available in the market. The proper study of these forces helps in creating better policies that will help in keeping business ahead. Environmental Threat and Opportunity Profile Analysis (ETOP)ETOP method analyses the environmental threats and opportunities. It identifies the opportunities available to businesses and threats that may restrain it. ETOP technique divides the environment into different sections and performs a systematic environmental scanning to study their impact on business. PESTLE AnalysisPESTLE analysis is an external environment analysis tool that focuses on analyzing the political, economic, social, technological, legal and environmental forces influencing the business. PESTLE provides a full overview of the external environment by analyzing these 6 forces and helps in strategic planning for the business. Market surveyMarket survey is another effective tool used for analyzing the external environment of business. It involves acquiring information by interacting with the peoples in the market which helps in knowing the new trends and challenges. This way companies are able to meet the requirements and likings of customers. ForecastingForecasting means predicting the future information on the basis of collected information. Here future events are estimated using different techniques like survey method, observation method, time series analysis, brainstorming, etc. By Indeed Editorial Team Updated June 1, 2022 | Published June 29, 2021 Updated June 1, 2022 Published June 29, 2021 An environmental analysis helps organizations identify internal and external elements that can either negatively or positively impact their business. By looking at factors, such as the economy and technology, businesses can anticipate potential opportunities and threats. Learning about how to conduct an environmental analysis can help you prepare an effective marketing strategy for your business. In this article, we explore what an environmental analysis is, explain the purpose of using it, outline the environmental analysis process and discuss the PESTLE analysis. What is an environmental analysis?An environmental analysis, or environmental scanning, is a strategic tool you can use to find all internal and external elements that may affect an organization's performance. Internal components indicate the business's strengths and weaknesses, while the external components indicate the opportunities and threats outside the organization. An environment analysis considers trends and high-level factors, such as interest rates, and how they might change a company's business. These reviews can help companies assess market attractiveness and create better strategies for the future. Related: What Is External Analysis? Definition and Examples What is the purpose of an environmental analysis?Environmental analyses help businesses identify potential influences that may provide either an opportunity or threat for them. This helps them prepare for changes in their environment. Some benefits of using an environmental analysis include:
Related: Purpose of a SWOT Analysis What is the environmental analysis process?The environmental analysis process consists of the following steps: 1. Identify environmental factorsTo conduct an environmental analysis, start by selecting environmental factors to evaluate. This depends on your type of industry. For instance, if you work for a healthcare facility, you may want to consider legal factors, such as health and safety regulations. When selecting factors, choose ones that have the potential to impact how you do business. 2. Gather informationOnce you decide which factors to evaluate, collect information related to your selected environmental factors. Here you may observe your factors and do some research. There are two main types of information to collect: verbal and written information. Individuals obtain verbal information through hearing, such as listening to a radio broadcast, whereas they obtain written information by reading sources, such as a newspaper or magazine. Using the above example, this would involve researching online and in medical magazines to see if there were any changes to health and safety regulations that may impact your health facility. 3. Evaluate your competitorsTo determine if there are any threats from your competitors, you may want to collect information about them. You can do this using a technique called spying, where you collect information in a nontraditional way. Using the same scenario, you may spy on a nearby health facility to learn about their recent activities, such as a new branch opening. 4. Forecast the impactForecasting allows you to predict how certain environmental factors may impact your business. This allows you to anticipate potential threats or opportunities. When forecasting, there are a variety of methods to use, such as brainstorming and surveying. Continuing with the same example, the health facility may forecast that the new branch opening at their competitor's facility may take away some of their patients. 5. Assess your strategiesFinally, assess your current and potential strategies to determine how the projected environmental changes may affect your organization. This helps you resolve potential challenges that may have resulted from the factors. For instance, the health facility may want to create a new strategy for how they plan to address the decrease in clients due to their competitor's new branch. Related: How To Do Market Analysis (With Steps and Tips) What is the PESTLE analysis?The PESTLE analysis, sometimes abbreviated to PEST, is a common method for conducting an environmental analysis. Organizations use this to look at factors that may impact the profitability of their business. PESTLE stands for the following factors: PoliticalPolitical factors examine the country's current political situation. This often involves evaluating to see if the government is stable or likely to change soon. Political factors to consider include:
Related: 10 Techniques for Effective Business Analysis EconomicalWhen conducting an environmental analysis, businesses often look at economic factors, or the current state of the economy. This allows them to design strategies based on the direction the economy appears to be going. For instance, if the unemployment rates are low, a business may assume the economy is in a good condition and consider opening another branch. Other economic factors to consider in your review are:
SocialSocial factors are the attitudes a country has that may impact business. For instance, in some cultures, individuals eat a diet based on their religion. This may affect the sales of certain foods in that area. Some examples of social factors include:
Related: PEST Analysis: What It Is and How To Use It TechnologicalTechnological factors include advancements and innovations that may change how a company conducts business. For some businesses, this may positively impact their processes by utilizing automation to speed up creation. However, technology may also replace some job positions. Technological factors to consider in your analysis include:
LegalLegal factors look at legislative changes that may impact the environment of a business. When regulatory bodies set new regulations for a particular industry, such as healthcare, it may impact that industry. Some legal factors to be aware of include:
EnvironmentalEnvironmental factors look at how the geographical location may affect a business. Certain conditions in a given area may impact trade. Environmental factors to consider in your review are:
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What are the types of environmental analysis?
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