Environmental Analysis: Definition, Types, and Benefits

By Indeed Editorial Team

Published May 27, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

It's important for organizations to assess external and internal factors that may affect their business. Environmental analysis is the process of studying these factors and making decisions based on the findings. Learning how to conduct this type of analysis can help you prepare an effective marketing strategy for the business you work for.

In this article, we explore environmental analysis, explain its purpose, outline some of the methods used, and discuss the factors to consider when using these methods, including their main advantages and limitations.

What is an environmental analysis?

An environmental analysis, or environmental scan, is a review of the internal and external factors that can affect an organization. Internal components indicate the organization's strengths and weaknesses, while external components show the opportunities and threats in the outside environment.

An environment analysis considers trends and high-level factors, such as interest rates and how they might affect the business. These reviews can help companies identify opportunities and threats to make informed decisions about their futures.

Related: How to Write an Analysis (With Importance and Tips)

What is the purpose of this analysis?

Environmental analyses help businesses identify potential influences that may provide opportunities or threats. The analysis process considers both internal and external factors, ranging from the economic climate to changes in technology. The goal is to help companies understand how outside factors may impact their ability to achieve their desired outcomes. Some benefits of using this analysis include:

  • Forecasting the future to enable more effective planning

  • Identifying threats to allow the development of appropriate response strategies

  • Helping to achieve business objectives

  • Providing evidence to help develop effective strategies and marketing programs

  • Gathering information to improve the performance of an organization

How to conduct this analysis

The environmental analysis process comprises the following steps:

1. Identify environmental factors

To conduct this analysis, start by selecting the environmental factors to evaluate. This depends on the type of industry. For instance, if you're an employee in a healthcare facility, consider legal aspects, such as health and safety regulations. When selecting factors, choose ones that have the potential to impact the business you work for.

2. Gather information

Once you decide which environmental factors to evaluate, collect data concerning them. You may do some research to obtain more information, either verbally or in writing. You receive verbal information when you speak to people, or you listen to a broadcast of any kind. You receive written information from traditional sources, including books or newspapers, or from online sources. If you are an employee in a healthcare facility, you may research online and in medical journals to check for any changes to health and safety regulations that might impact the business you work for.

3. Evaluate the competition

To determine whether the competition presents any threats, collect information about them. You can do this using a spying technique, where you collect data in a non-traditional way. For example, using the same scenario, you may observe a nearby health facility to learn about its recent activities, including whether it is opening a new branch. This helps you understand the competition and how it may impact the business you work for.

4. Forecast the impact

Forecasting allows you to predict how certain environmental factors may impact the business. This may enable you to expect potential threats or opportunities. There are various methods to use when forecasting, such as brainstorming and surveying. For example, a health facility may forecast that a new branch opening at their competitor's facility may take away some of their patients.

5. Assess your strategies

Finally, assess the business's current and potential strategies to determine how the environmental changes that the analysis predicted may affect it. This helps you resolve potential challenges that these changes may cause. For instance, a health facility may want to create a new strategy to address the decrease in patients because of its competitor's new branch.

Factors that affect this analysis

To effectively complete this analysis, it's important to consider certain factors. These include:

Timing

The timing of your analysis is important because you want to capture up-to-date information and analyze the changes as soon as they happen. Assessing the timing helps you maximize the relevance of your results.

Scope

It's important for your analysis to be broad enough to cover all the potential environmental factors that may affect the business while still being as concise as possible to make it easy to manage and interpret. This helps improve the accuracy and the relevance of the findings.

Data collection

It's important to use accurate and reliable data to conduct your analysis. It's best to use a variety of data sources to gain a well-rounded view. It's also best to use current data that reflects the most recent changes in the environment.

Related: How to Do Market Research With 6 Guided Steps (With Types)

Analysis methods

Use the most appropriate and effective method to analyze your data. You want to ensure that you're using the right tools to help you make sound decisions. You may also want to use the same methods consistently over time so that you can accurately compare results from different periods.

Reporting

Once your analysis is complete, it's important to present your findings clearly and concisely. This allows decision-makers to understand the implications of any changes and make informed decisions. Also, make sure your report is easy to read so that the findings are clear.

Methods to conduct the analysis

There are various methods that you can use to conduct the analysis. The most common are:

A political, economic, social, technological, legal, and environmental (PESTLE) analysis

The acronym PESTLE represents all the external factors that a business can usefully evaluate. The biggest benefit of using this method is that it provides a comprehensive view of the external environment. The drawback is that it could encourage oversimplification. To avoid this, it's important to use a variety of methods and compare your findings.

A strengths, weaknesses, opportunities, and threats (SWOT) analysis

The acronym SWOT represents the factors that help to evaluate the internal environment of a business. The benefit of using this is that it's easy to understand and quick to complete. The drawback is that it may not provide a comprehensive view of the environment. To prevent this, it's important to supplement a SWOT analysis with other environmental assessment methods.

Related: SWOT Analysis Example, Steps, and Importance at Work

Porter's five forces analysis

Porter's five forces analysis evaluates the competitive environment within an industry. It considers the threats of new entrants, buyers' bargaining power, suppliers' bargaining power, the threat of substitutes, and the intensity of rivalry. The method provides a detailed view of the competitive environment. The drawback is that it does not consider business strategies or technological factors, so you may want to use another tool in conjunction with this to gain a more comprehensive view.

Environment threat and opportunity profile (ETOP) analysis

The acronym ETOP represents a tool that helps businesses identify opportunities and threats from the external environment that may impact them. The biggest advantage of using this tool is that it provides an accurate view of the company's competitive position. The limitations are that it does not show how these factors interact and does not represent a dynamic environment. To mitigate this, businesses may decide to update their ETOP analysis as frequently as possible.

Quantitative strategic planning matrix (QSPM)

You can use a QSPM to analyze the resources and capabilities of a business in the context of its environmental opportunities and threats. The significant advantage of a QSPM is that it allows a simultaneous comparison of opportunities and threats. The drawback is that it only evaluates strategies in relation to each other, so it's important to supplement this analysis with additional research. The output from a QSPM is often a prioritized list of strategies that can help the company capitalize on opportunities while mitigating threats.

Market survey

A market survey collects data about customer requirements and preferences. This data can then help you to assess the viability of a product or service in the market. The benefit of a market survey is that it provides detailed information about the target market. The limitations are that it's expensive to conduct, and it takes time to compile the results, so it's important to start early.

Management information system (MIS)

A MIS collects, organizes, and distributes information to help managers make informed decisions. It can help you collect data about the external environment and the internal operations of a business. It's beneficial because it encourages decentralization and minimizes data overload. The drawback is that it's expensive to set up and requires constant monitoring, so it's important to select the right system for the business.

Forecasting

Forecasting is predicting future events using past data and trends. Businesses can use forecasting to predict environmental changes and their potential impacts. The limitations are that the results may be inaccurate or biased, so it's important to use a variety of resources when forecasting.

Focus group

A focus group is a qualitative research method that involves asking a small group of people about their opinions on a product, service, or issue. The focus group can give a general sense of how people feel about something. The major advantage of using a focus group is that it provides detailed information about people's opinions. The drawback is that the data may not represent the entire population, so it's important to use a focus group in conjunction with other research methods.

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