7.5: Environmental Analysis

A business environment analysis is a systematic process that evaluates the internal and external factors impacting a business. Before planning can be done, an analysis of the business environment should be conducted by researching and analyzing market conditions, competition, trends, and other external factors that could influence the business’s strategy. Environmental analysis plays an essential role in a company’s strategic planning by providing a clear and thorough understanding of external business factors and how they affect the company. Analyses help the company to take advantage of opportunities, reduce risks, and come up with good plans that lead to growth and success.

As this book is written for an introduction to business (usually a survey course at colleges and universities), we will not take these concepts into too much depth. Later in your business studies, when you complete management, leadership, analytics, and other courses, you will utilize these analysis models to a fuller extent.

PEST Analysis

PEST is the term used for an external environment scan, whereby a business collects and analyzes data on the political, economic, social, and technological aspects of the environment in which the business operates. PEST can be extended to include the legal, environmental, and ethical aspects of the business environment, and when included, the acronym is referred to as PESTEL or PESTLE, PESTLEE. Many people refer to the analysis as a PEST analysis and include all the factors mentioned here. (Refer to Figure 7.4.)

SWOT Analysis

A SWOT analysis is a framework for identifying and analyzing an organization’s strengths, weaknesses, opportunities and threats. These words make up the SWOT acronym. The primary goal of a SWOT analysis is to increase awareness of the factors that go into making a business decision or establishing a business strategy.

Each of the four components of a SWOT analysis is explained in greater detail below.^[1]

• Strengths. Your Strengths are internal positives about your company that you can control and that often provide you with a competitive advantage. Some examples might be the quality of your product, the effectiveness of your processes, your access to physical or team assets or other competitive advantages.
• Weaknesses. A Weakness is an adverse internal attribute of your company that detracts or takes away from your strengths. Some examples might include knowledge gaps on your team, a low-quality product, a lack of money or other tangible assets, bad location and more.
• Opportunities. An Opportunity is an external factor that provides promise or is likely to contribute to your potential success. Some examples might include the growth rate in your industry, specific laws or policies that will benefit the need for your product, positive customer feedback or technological advancements.
• Threats. A Threat is an external factor that you have no control over, which could negatively impact your success. These are typically acknowledged so that you can provide a plan to overcome each one. Some examples include potential future competitors, costs of supply, upcoming market trends, negative technology changes and upcoming regulations or laws.

Competitor Analysis

A competitor analysis in business involves examining similar brands in the same industry to gain insight into other companies’ offerings, brands, sales, and marketing approaches.

Media Attributions

“Figure 7.4: Acronym for PESTEL: Political, Economic, Sociocultural, Technological, Environmental, and Legal” is adapted from External Forces that Influence Business Activities in NSCC Fundamentals of Business, © Pamplin College of Business and Virgina Tech Libraries, licensed under CC BY-NC-SA.

Image descriptions

Figure 7.4

The image is a vertical infographic outlining the PESTEL framework. Each category is represented by an orange rightward-pointing arrow containing the first letter of its name in white, bold text. To the right of each arrow, the category name is in black bold text, followed by a brief description in smaller black text:

P – Political: The impact of government including taxes, tariffs, trade agreements, and labor regulations

E – Economic: Includes inflation, employment rates, exchange rates, oil prices, GDP growth and others

S – Sociocultural: Includes cultural attitudes and demographic factors such as age, race, and income

T – Technological: Includes the impact of the internet, smart devices, and automation on business and society

E – Environmental: Includes availability and care for natural resources, pollution levels, and carbon footprints

L – Legal: Requirements related to labor and consumer protection, equality, and product safety

[back to figure]