Environmental analysis is crucial in strategic management as it identifies opportunities and threats in the external environment, including political, environmental, technological, and sociological events. It is conducted as part of a SWOT analysis and should be done quarterly or annually depending on the industry. The analysis helps companies gain a competitive advantage and reduce the risk of being unprepared for incoming threats.
An environmental analysis in strategic management plays a crucial role in businesses by identifying current and potential opportunities and threats outside the business in its external environment. The external environment includes political, environmental, technological and sociological events or trends that can directly or indirectly affect the business. An environmental analysis is typically conducted as part of a strengths, weaknesses, opportunities, and threats (SWOT) analysis when developing a strategic plan. Managers practicing strategic management should conduct a quarterly, semi-annual, or annual environmental review, depending on the nature of the business sector. Being able to identify events or conditions in external environments helps companies gain a competitive advantage and reduce the risk of being unprepared for incoming threats.
The purpose of an environmental review is to assist in strategy development by keeping decision makers within an organization informed about the external environment. This can include changing political parties, increased regulations to reduce pollution, technological developments, and shifting demographics. If a new technology is developed and used in another industry, a strategic manager would see how this technology could also be used to improve processes within his or her business. An analysis allows companies to get an overview of their environment to find opportunities or threats.
A SWOT analysis is performed as part of a company’s strategic planning process. Internal analysis reviews the strengths and weaknesses of the business, while external environmental analysis looks at opportunities and threats. The role of environmental analysis in strategic management is to identify any potential opportunities and threats and to create a plan to exploit the opportunities or avoid the threats. If a threat cannot be avoided, such as a demographic change that is causing a decline in sales, a plan must be created to minimize its effects. For example, the company might develop a product that targets the new demographic majority.
How often this type of analysis should be conducted depends on the nature of the industry. If the industry is fast-paced or susceptible to changing legislation, then the company should consider doing its reviews quarterly or semi-annually. An industry that does not face constant change or is not sensitive to changes in the external environment may only need an annual review. A company that conducts an environmental review is often more aware of the opening of opportunities and can exploit them more quickly than its competitors can. Increasing the frequency with which an environmental review is conducted can also help the company see potential risks earlier, allowing it additional time to develop a strategic plan to avoid or reduce its potential effects.
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