What is an Environmental Analysis? All Your Questions Answered

Business Environment Analysis August 21, 2020

Lauren Christiansen

Writer

Because market research is based on ever-changing variables, businesses must always consider varying factors and the changing environment in their data analysis.

Part of the challenge in adapting to changing variables is knowing how to adequately prepare for it and identify them. Mapping out a response to each potential external and internal environmental disuption by writing an optimized environmental analysis is an effective way to adapt to change.

Here's what to know about the external environmental conditions businesses face and how they can cope by utilizing an environmental assessment.

What is an External Business Environment?

An external environment is composed of all of the external factors that affect the operation of a business. Two aspects of an external environment are-

The Operating Environment
This refers to the company's suppliers and customers, as well as the marketers who promote or sell a company's products and services to customers and the public.

The General Environment
This includes an array of external influences that affect a company, such as technology, economic conditions, international trade agreements, demographics, politics, and the legal environment.
The operating and general environment can either provide opportunities for increased growth and revenue, or they can generate uncertainties and risks that companies have to adapt to. Provided are some examples of how operating and general environmental factors can impact a business.

The Operating Environment

Positive- A retailer's marketing department ran a successful online advertising campaign for 6 months. The campaign targeted prospective and current customers, leading to an increased amount of online purchases, many from new users.

Negative- A restaurant's change in management has lowered the quality of customer service, leading to a decreased level of customer satisfaction. Customers have made several complaints, and there have been fewer patrons frequenting the restaurant.

The General Environment

Positive- Strong economic conditions and lower property taxes have allowed an auto shop to open up an additional location.

Negative- The FDA has issued a warning that a supplement is unsafe. Several states have banned the sale of that particular supplement. A vitamin shop that continues to sell it has lost many of its customers due to the FDA warning.

What is the Purpose of an Environmental Analysis?

An environmental analysis is a strategic analysis tool to identify all of the external and internal factors that can affect a company's performance. The purpose is to assess the level of risk various environmental factors pose as well as the business opportunities they present. The analysis considers the company's strengths and weaknesses and how they affect the ability to handle external threats/opportunities.

Successful businesses can usually modify their internal business strategy and operating procedures to adapt to external circumstances. For example, Google is working with China on building a censored search app that could serve over 99% of queries. This move has been criticized by many who believe that it conflicts with Google's mission to organize the world's information and make it universally accessible and useful. However, it demonstrates that companies can find a way to expand even when confronted by political or legal challenges.

Environmental Analysis Process

Creating a strategic analysis is a 3-step planning process-

1. Identify Factors
The company must first determine which internal and external factors may affect a business. More often than not, there is a combination of different elements at stake.

For example, Toys R Us went out of business due to increasing competition from discount stores such as Target and Amazon. They were also saddled with debt from a buy out in 2005. The two environmental factors that affected Toys R Us were internal financial problems and external competing markets.

2. Gather Information
The company then gathers information about the identified internal and external conditions that impact business operations.

For example, some localities regulate or prohibit the usage of digital billboards due to environmental concerns. A company that utilizes digital billboards to run advertisements across many locations has heard that new regulations may affect their ability to run ads during certain hours. The company would then review the local ordinances and regulations to see if they can continue running their campaigns in each of their locations, or if they need to change their advertising strategy.

3. Determine Impact
The gathered information predicts how environmental factors will affect the business. Internal operational and financial processes need to be reviewed to determine how the company will be able to respond to each risk.

For instance, a company has an opportunity to sell their products in another country. However, that country is currently experiencing poor economic conditions which might affect sales. The company can then determine whether the number of sales would exceed the cost of expanding its market to another company and whether they could take the financial hit if the endeavor failed.

Common Framework for Measuring Environmental Risk

Environmental scanning is frequently utilized to help organizations scan the landscape of competitors, customers, economic conditions, market conditions, etc. before implementing a new product/service. A commonly utilized project management tool to perform environmental scanning is PESTEL, which refers to the political, economic, social, and technological factors affecting a company. Here are the different components of a PESTEL analysis, by letter.

Political
Political issues refer to the government's level of intrusion in an organization's operations. Particular issues of concern are taxation, tariffs, regulations, elections, and political stability. For example, different political parties have different stances on increasing the minimum wage. Small businesses may pay attention to an election where one candidate proposes an increase in the minimum wage because it can affect their product/service prices and ability to maintain current employees.

Economic
Businesses who operate within the United States first focus on the health of the American economy as a whole, including growth, employment, inflation, and interest rates. Organizations that operate outside of the U.S. will focus on exchange rates. For example, a startup may evaluate the current health of the economy to determine whether or not they will be able to sustain themselves, as economic conditions affect a company's long-range revenue and expenses.

Social
Social issues involve shifts in age, demographical changes, changing attitudes towards safety and health, consumer preferences and technological advancements, or population growth. For example, 86% of millennials utilize social media. As a result, companies who see millennials as their target audience are more likely to run promotional advertisements on social media platforms.

Technology
Technology includes research and development, robotics, automation, or any type of technological change. Technological disruption refers to innovations that completely change the cast of leading competitors. For example, Facebook's popularity was a technological disruption for Myspace, who was considered a dominating social media platform back in the early 2000s.

Environmental
Climate change, weather, air quality, and natural disasters are all environmental factors. Some industries are especially at risk from changes in the environment, including agriculture or tourism. To illustrate, farmers may watch the Weather channel or read the Farmer's Almanac because the weather can affect pesticide application, irrigation scheduling, planting dates, or fungicide application.

Legal
Legal factors include employment, health, and safety policies. Discrimination and consumer protection laws can also affect a company's ability to operate. For example, the 2009 Dodd-Frank Act was passed by Congress after the Great Recession to place strict regulations on banks to protect consumers. Many larger banks were able to cope with the regulations imposed on them, but 90% of small banks claimed that compliance costs increased too dramatically and 81% said Dodd-Frank was too financially burdensome.