An external environmental analysis studies information about a business's industry, competition, and political and social environments. These factors affect the business but are out of its control, such as when a new political party takes office and changes regulations, in turn requiring the business to invest in new equipment or modify its products. An analysis of the external environment includes a list of factors in a business's external environment and their influence on the business. It further discusses opportunities the business can pursue and threats that could negatively impact it. This type of analysis concludes with a plan on how the business can take advantage of opportunities and either overcome or minimize its threats.
Changes in the external environment are caused by factors outside of a company's control. For instance, its customer base can change when faced with shifting demographics, trends and needs. Likewise, the competitive landscape can change because of the entrance, exit or development of new technologies. The economic and political environments also can affect it when there are changes in political parties, when new regulations are added or when economic instability occurs. Not all changes in a business's external environment are threats — a company that heavily invested in green technology, for instance, might find itself a leader in the industry because of the shift in consumer demand.
Conducting an external environmental analysis requires a business to research and acknowledge factors that are outside of its control. The list should then be reviewed to see if opportunities or threats exist. When an opportunity is found, the business should develop a strategy in order to take advantage of it. For instance, if the economy is moving out of a recession, then it might want to increase production so it does not miss out on sales when demand rises. If any threats or potential threats are found, then the business should prepare plans to either overcome or reduce the impact.
Regularly performing an external environmental analysis can help businesses create or maintain a competitive advantage. It is easy to overlook the full external environment when focused on day-to-day operations, so opportunities can be lost, or threats can turn into bad surprises. Depending on the industry, an annual analysis should be sufficient. If the industry is fast-paced, sensitive to changing regulations or susceptible to a shifting competitive landscape, however, then either a quarterly or semi-annual analysis should be pursued. Typically, an external environmental analysis is done as part of a strengths, weaknesses, opportunities, and threats (SWOT) analysis, where the company looks at both internal and external environments in the same report.
