What is Environmental Analysis?
Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization’s performance. The analysis entails assessing the level of threat or opportunity the factors might present. These evaluations are later translated into the decision-making process. The analysis helps align strategies with the firm’s environment.
Our market is facing changes every day. Many new things develop over time and the whole scenario can alter in only a few seconds. There are some factors that are beyond your control. But, you can control a lot of these things.
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 trade environment and the market.
There are many strategic analysis tools that a firm can use, but some are more common. The most used detailed analysis of the environment is the PESTLE analysis. This is a bird’s eye view of the business conduct. Managers and strategy builders use this analysis to find where their market currently. It also helps foresee where the organization will be in the future.
PESTLE analysis consists of various factors that affect the business environment. Each letter in the acronym signifies a set of factors. These factors can affect every industry directly or indirectly.
The letters in PESTLE, also called PESTEL, denote the following things:
- Political factors
- Economic factors
- Social factors
- Technological factors
- Legal factors
- Environmental factor
Often, managers choose to learn about political, economic, social and technological factors only. In that case, they conduct the PEST analysis. PEST is also an 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 demographical factors.
I will discuss the 6 most commonly assessed factors in environmental analysis.
P for Political factors
The political factors take the country’s current political situation. It also reads the global political condition’s effect on the country and business. When conducting this step, ask questions like “What kind of government leadership is impacting decisions of the firm?”
Some political factors that you can study are:
- Government policies
- Taxes laws and tariff
- Stability of government
- Entry mode regulations
E for Economic factors
Economic factors involve all the determinants of the economy and its state. These are factors that can conclude the direction in which the economy might move. So, businesses analyze this factor based on the environment. It helps to set up strategies in line with 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
S for Social factors
Countries vary from each other. Every country has a distinctive mindset. These attitudes have an impact on the businesses. The social factors might ultimately affect the sales of products and services.
Some of the social factors you should study are:
- The cultural implications
- The gender and connected demographics
- The social lifestyles
- The domestic structures
- Educational levels
- Distribution of Wealth
T for Technological factors
Technology is advancing continuously. The advancement is greatly influencing businesses. Performing environmental analysis on these factors will help you stay up to date with the 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 know how the consumers react to various trends.
Firms can use these factors for their benefit:
- New discoveries
- Rate of technological obsolescence
- Rate of technological advances
- Innovative technological platforms
L for Legal factors
Legislative changes take place from time to time. Many of these changes affect the business environment. If a regulatory body sets up a regulation for industries, for example, that law would impact industries and business in that economy. So, businesses should also analyze the legal developments in respective environments.
I have mentioned some legal factors you need to be aware of:
- Product regulations
- Employment regulations
- Competitive regulations
- Patent infringements
- Health and safety regulations
E for Environmental factors
The location influences business trades. Changes in climatic changes can affect the trade. The consumer reactions to particular offering can also be an issue. This most often affects agri-businesses.
Some environmental factors you can study are:
- Geographical location
- The climate and weather
- Waste disposal laws
- Energy consumption regulation
- People’s attitude towards the environment
There are many external factors other than the ones mentioned above. None of these factors are independent. They rely on each other.
If you are wondering how you can conduct 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.
It is true that industry factors have an impact on the company 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.
The analyses provide a good look at factors like revenue, profitability, and corporate success. If you want to take the right decisions for your firm, employ environmental analysis. The analysis you should conduct depends on the nature of your company.