What is environmental analysis in simple words? Learn about its different types and get an idea of how you can conduct this type of business analysis.
When you think about what makes a business successful, several factors immediately come to mind. It has a lot to do with the resources invested and acquired, the human resources, the relevance of the business deliverables and so much more. However, the environment in which the business operates or exists has a lot of impact as well.
The environment be it internal i.e. inside the organization of the business or external i.e. outside of it actually shapes the business in a holistic sense. This is why it becomes important to analyze the environment, so we know what decisions have to be made.
So you see, environmental analysis is a strategic tool we use to understand the success or lack thereof of a business.
It is a process to identify all the external and internal elements, which can affect the organization’s performance. The environmental analysis entails assessing the level of threat or opportunity various factors might present. These evaluations are later translated into the decision-making process. The analysis helps align strategies with the firm’s environment.
The business market is extremely dynamic meaning that things and trends change as quickly as they emerge. Sometimes a trend becomes obsolete before it even catches on around the world. Obviously, we cannot control how trends emerge or die out, what we can do is observe certain factors which can aid us in dealing with the changes.
Businesses are greatly influenced by their environment. All the situational factors which determine day-to-day circumstances impact firms. So, businesses must constantly analyze the overall environment and the market.
There are many environmental analysis tools that a firm can use, but some are more common. The most used tool for a thorough environmental analysis of an organization or even of an industry is the PESTLE analysis.
PESTLE Analysis
This is essentially a bird’s eye view of business conduct because we broadly look at certain macro factors which have a lot of influence on the wellbeing of a certain business or a certain industry. Managers and strategy builders use this analysis to find where their market currently is. It also helps foresee where the organization will be in the future.
PESTLE analysis consists of various factors that affect the business environment. It is a macro-economic tool used to understand specifically the external environment of the greater environmental analysis. Each letter that you see in the acronym stands for a certain factor. These factors can affect every industry or organization directly or indirectly.
The letters in PESTLE (also written PESTEL), denote the following things:
- Political factors
- Economic factors
- Social factors
- Technological factors
- Legal factors
- Environmental factors
Often, managers choose to learn about political, economic, social, and technological factors only. In that case, they conduct the PEST analysis. PEST is also a form of environmental analysis. It is a shorter version of PESTLE analysis. STEP, STEEP, STEEPLE, STEEPLED, STEPJE, and LEPEST: All of these are acronyms for the same set of factors. Some of them gauge additional factors like ethical and demographic factors as well.
It does not matter what format you choose to work with when you want to work on environmental analysis. In fact, it is best if you choose the template that best suits the needs of your organization.
However, for the sake of keeping things convenient, I will discuss the 6 most commonly assessed factors in environmental analysis.
Political factors
The political factors basically cover the country’s (in which the business operates) current political situation. It also reads the global political condition’s effect on the country and business. When working on this factor, it is important to assess the governmental policies and regulations regarding the industry you operate in to find barriers as well as opportunities.
Some political factors that you can study during an environmental analysis are:
- Government policies
- Taxes laws and tariff
- Stability of government
- Entry mode regulations
So you see, politics are very important to keep in mind when thinking of starting a business or even when expanding one. Political statements by important political personnel who might be connected to a company also can be very detrimental to the prosperity because if they utter even a single word against the social values of the country, they have to face repercussions.
Economic factors
Economic factors, as the name suggests, involve all the determinants of the economy and its state in environmental analysis. These are factors that can conclude the direction in which the economy might move. So, businesses analyze this factor based on the economy of the host country of the business or the country to which it wishes to expand to. It helps to set up strategies in line with any potential changes.
I have listed some determinants you can assess to know how economic factors are affecting your business below:
- The inflation rate
- The interest rate
- Disposable income of buyers
- Credit accessibility
- Unemployment rates
- The monetary or fiscal policies
- The foreign exchange rate
It goes without saying that the number one goal of any business is profit generation and maximization; every move that a company makes is done to ensure they make more money.
Naturally stronger economies encourage business development and growth whereas struggling ones do the opposite. So, one has to be wary of economic factors when working on an environmental analysis for some company or for some industry.
Social factors
Countries vary from each other in more aspects than one. Every country has a distinctive mindset, traditions, cultures, values, beliefs, and norms. These factors have an impact on the businesses that exist in these countries. The social factors might ultimately affect the sales of products and services provided the host business makes good use of them.
Some of the social factors you should study for an environmental analysis are:
- The cultural implications
- The gender and connected demographics
- The social lifestyles
- The domestic structures
- Educational levels
- Distribution of Wealth
These factors can have the most influence on the popularity (the positive kind) of a business because they dictate how strongly a business is intertwined with the host country’s pop culture and traditions. They are perhaps the most important to consider when a business wants to market its offerings effectively.
Never overlook socio-cultural factors during an environmental analysis; they are more important than they might appear to be in front of the other factors.
Technological factors
The advancement of technology is nothing short of extraordinary. The rate at which it evolves and transforms is exponential.
The advancement naturally greatly influences businesses. Performing environmental analysis including this factor will help you stay up to date with the occurring changes. Technology alters every minute. This is why companies must stay connected all the time. Firms should integrate when needed. Technological factors will help you in identifying opportunities or even limitations to your business growth.
Firms can use these factors in the environmental analysis for their benefit:
- New discoveries
- Rate of technological obsolescence
- Rate of technological advances
- Innovative technological platforms
If a business accurately identifies all the technologies it can implement to grow operations and to increase productivity in a sustainable fashion, they have done their environmental analysis very well.
Legal factors
Legislative changes take place from time to time. Many of these changes affect the business environment because they govern how they are to go about without any violations. If a regulatory body sets up a rule for industries, for example, that law would create certain limitations or rather boundaries for all the businesses within that industry. So, businesses should also analyze the legal developments in the respective environmental analysis.
I have mentioned some legal factors you need to be aware of:
- Product regulations
- Employment regulations
- Competitive regulations
- Patent infringements
- Health and safety regulations
Laws and regulations have the power to outright shut down businesses under certain conditions. So it is compulsory that one knows during the environmental analysis what legalities to look out for.
Environmental factors
The location influences business trades. Changes in climatic changes can affect the trade. The consumer reactions to particular offerings can also be an issue. This most often affects agri-businesses. The environment in which a business exists has a lot of impact on it and from it; all the side effects a business’s operations may have on stakeholders and the environment also comes under here.
The environment is also a very important factor to be studied in an environmental analysis; very fitting no?
Some environmental analysis factors you can study are:
- Geographical location
- The climate and weather
- Waste disposal laws
- Energy consumption regulation
- People’s attitude towards the environment
It should be a part of every business plan to avoid harming the environment in any way. The wastage should be minimized and the toxicity of production be eliminated as much as possible.
There are many external factors other than the ones mentioned above. None of these factors are independent. They rely on each other to make complete sense and relevance to the study.
If you are wondering how you can conduct an environmental analysis, here are 5 simple steps you could follow:
- Understand all the environmental factors before moving to the next step.
- Collect all the relevant information.
- Identify the opportunities for your organization.
- Recognize the threats your company faces.
- The final step is to take action.
Other than PESTLE, you can also look at other situational factors that can guide the environmental analysis. A SWOT analysis is another tool business experts use to analyze their organizations and industries.
SWOT Analysis
For those of you who don’t know, SWOT stands for strengths, opportunities, weaknesses, and threats. These four factors are used to understand where a business is standing in strategic terms.
These four factors are classified into two categories. It is important for us to discuss them a bit so we can see how they help in conducting an environmental analysis.
Internal Factors
Strengths and weaknesses make up the internal factors of this form of environmental analysis. They are called internal because they actually can be influenced and even controlled by the organization. If a company has a very strong brand name, this would be a strength because it was made possible by the effective use of resources by them.
So this is an internally created factor, which highlights one of the reasons the business is strong.
External Factors
Threats and opportunities make up the external factors of this form of environmental analysis. Unlike the factors above, they cannot be controlled by the company in any shape or form. In fact, these factors occur on their own, often unprecedented. All companies have competitors; this is a threat because one can’t simply eradicate competition.
Hence, this is how external factors work. So now that you know how to work with a SWOT analysis, you can use these findings to add to the environmental analysis.
The strengths can further be built upon, the weaknesses can be eradicated by making use of opportunities timely and threats can be mitigated by keeping wary of them.
Environmental Analysis: Final Word
Now that you have made your way towards the end of this article, you probably understand what an environmental analysis is, how it can be done and why it is needed. We have covered a lot of information regarding the topic so that you may conduct one for yourself.
We have covered what PESTLE analysis is and all the other takes on the framework. We have also talked about the SWOT in detail. Both of these tools talk about the external environmental analysis but SWOT also addresses factors for internal environmental analysis.
It can safely be concluded that industry factors have an impact on the company's performance. Environmental analysis is essential to determine what role certain factors play in your business. PEST or PESTLE analysis allows businesses to take a look at the external factors. Many organizations use these tools to project the growth of their company effectively or before they are ready to explore new ventures and change their strategy, like in horizontal integration.
The analyses provide a good look at factors like revenue, profitability, and corporate success. If you want to make the right decisions for your firm, employ environmental analysis. The specific type of environmental analysis you should conduct depends on the nature of your company.
