Learn about environmental analysis: definition, importance, elements, example, and types. Discover how this process works and how it can optimize your company’s strategic planning.
An environmental analysis, also called an environmental scan, is a strategic tool used to identify and assess all external and internal elements in a business environment. It examines organizational and industry factors that can positively or negatively affect the business and its success. By anticipating short-term and long-term impacts, the organization can readily respond to them when they appear.
An environment analysis assists organizations in defining factors that can influence their business operations. By weighing these elements, they can foresee the trajectory of their business given the circumstances. This approach allows them to develop a strategy that takes advantage of opportunities and reduces threats.
Incorporating an environmental analysis in the strategic planning sessions helps businesses systematically approach their decision-making process. This way, organizations can achieve their business goals and propel their performance to new heights.
An environmental analysis consists of two major components: internal factors and external factors. This section will discuss them in detail.
These components ask organizations to look inward. They examine the organization’s strong and weak points based on its mission and vision. These factors also allow businesses to reflect on their direction and plans in a set period—say, in five or ten years.
On the other hand, external factors refer to high-level considerations that exist outside the organization. According to SHRM, businesses must examine the threats and opportunities present in the following matters:
Industry and market trends
Competition—their advantages and weak points
Customers—your customer base and customer service
Economy—economic activities that can impact the organization
Technology—technological advancements that can streamline operations
Labor supply—labor markets in areas of operation
Political and legal circumstances
The two common types of environmental analysis methods are the PESTLE analysis and SWOT analysis. These approaches help organizations assess their strategic positions based on a wide range of internal and external factors. Read on to learn about these methods.
The PESTLE analysis, or its shorter form PEST analysis, examines the factors which can influence a business on a larger scale outside the organization. It provides organizations with insights into the market status based on high-level trends concerning the market, customers, technology, and more.
The PESTLE method consists of six key elements for a comprehensive picture of the business’ macro-environment:
PESTLE Analysis
Political – local, state, and federal government policies, trade rules, tax regulations, and so on
Economic – unemployment rates, economic growth rates, foreign exchange rates, inflation, interest rates, and more
Social – demographic trends, consumer buying patterns, wealth distribution, attitudes and opinions, brand recognition, and so on
Technological – new technological discoveries and products, research and development areas, incentives for technology, and so on
Legal – health and safety regulations, employment laws, product regulations, tariffs, and more
Environmental – climate and weather conditions, energy consumption regulations, environmental policies, and more
The SWOT analysis evaluates a business’ strategic standing based on internal (strengths, weaknesses) and external (opportunities, threats) factors. It uncovers a company’s advantages and disadvantages based on its strong and weak points. In doing so, companies can devise a strategy that maximizes their opportunities while mitigating potential risks.
The SWOT method takes the shape of a 2 x 2 matrix containing the following elements:
SWOT Analysis
Strengths – What does the company do best? What is your company’s unique selling point?
Weaknesses – What areas does your organization need to improve? What resources do you lack?
Opportunities – What opportunities can you take advantage of based on your strengths?
Threats – What threats do your weaknesses expose you?
An environmental analysis follows a systematic process of uncovering factors that affect your business and its operations. While there’s no hard and fast rule on doing an environmental scan, these steps can guide you into making the most out of this process.
An environmental analysis, first and foremost, needs a list of the factors to evaluate. These factors will depend on your organization’s industry and geographical location.
This list should include both micro and macro-environmental factors that have short-term and long-term impacts on their operations. For example, a mining company can outline the latest trends in their industry and environmental regulations in their locality.
After outlining the environmental factors, the next step is to gather data related to them. You can utilize various sources to make sure the information is relevant and up to date.
For example, customer satisfaction surveys inform you about how your product or service performs in the market and what improvements you can make. Meanwhile, government websites work best if you’re following updates on relevant regulations.
When doing an environmental scan, your research doesn’t stop at your organization’s business standing. It’s also necessary to scope out how your competitors are performing. A competitor analysis can help you determine any threats that can weaken your business and opportunities that set you apart from the competition.
Once you’ve collected sufficient environmental information, you can now use them to predict how it can affect your business. This step sets your expectations, so you can prepare for the possible outcomes should these factors come your way. In assessing risks and their impacts, it’s vital to ask the following questions:
What are the consequences of this factor on your business?
How long will this last?
How will this affect the business (positively, negatively, or no impact)?
How important is this factor in the overall business operations?
The final step allows you to brainstorm and formulate strategies for the possible changes from these factors. It includes assessing current strategic plans and adjusting them based on the information you have gathered about your business environment, such as partnering with sustainable companies for environmental awareness events. Aside from this, you can also enumerate steps to maximize opportunities and minimize threats.
This environmental analysis example illustrates how the process works. For this case, a US-based food manufacturing company, Company XYZ, wants to expand its operations globally. Company XYZ will use the PESTLE method to assess its prospective business environment and devise steps to launch its operations effectively.
This table shows the six key factors and the details of their potential impact.
Political | Economic | Social | Technological | Legal | Environmental | |
Potential Factors | Trade restrictions due to the pandemic Ongoing international conflicts | Economic situations in X countries Inflation rates | Brand reputation Consumer buying patterns in X countries Attitudes to Y food products | Brand-new tools to manufacture quality food products in a short time frame Website and social media promotions | Food safety laws Consumer protection laws Health and safety regulations | Environmental policies Eco-friendly packaging materials Sustainability efforts |
Possible Outcomes | Trade barriers in select countries | Profitability for local versus overseas economies | Customer reception of our food products | Efficient manufacturing process and promotions overseas | Entry of product to the market | Pollution, raw material sources overseas |
Time Frame | Unknown | 6-12 months (can extend depending on the circumstances) | 6-12 months | 0-9 months | 0-3 months | Unknown |
Type of Impact Positive Negative No Impact Unknown | Negative | Unknown | Unknown (possibly positive) | Positive | Unknown (possibly negative) | Unknown |
Importance Critical Important Moderate Unimportant | Important | Critical | Important | Moderate | Critical | Moderate |
Business leaders can optimize their environmental analysis procedure using an all-in-one operations platform like Mitti (by SafetyCulture). This tool allows you to capture essential information about your internal and external business processes to help you gain an accurate picture of your business environment. iAuditor has the following capabilities to streamline your environmental scanning:
Streamline your environmental data collection process using pre-made checklists and forms
Document organizational processes in a centralized cloud storage
Proactively respond to weak points and threats using Actions
Develop an evidence-based strategic plan with the help of data analytics and insights
Export the data you collected to your preferred platform
Clearly communicate urgent matters found during the environmental analysis to your team and other members of your organization using Heads Up
Train your organization on the right processes and analysis methods necessary for your needs
You can also use the following templates when performing a business environmental analysis:
