External environmental analysis studies a company’s industry, competition, and political and social environments. Changes in the external environment are beyond a company’s control, but regularly reviewing it can help companies maintain a competitive advantage. Opportunities and threats should be identified and a plan developed to exploit or overcome them.
An external environmental analysis studies information about a company’s industry, competition, and political and social environments. These factors affect the company but are beyond its control, such as when a new political party takes office and changes regulations, in turn requiring the company to invest in new equipment or modify its products. An external environment analysis includes a list of factors in a company’s external environment and their influence on the company. It further discusses the opportunities the business may pursue and the threats that could negatively impact the business. This type of analysis concludes with a plan for how the business can exploit opportunities and overcome or minimize its threats.
Changes in the external environment are caused by factors beyond a company’s control. For example, your customer base can change in the face of changing demographics, trends and needs. Likewise, the competitive landscape can change due to the entry, exit or development of new technologies. Economic and political environments can also influence it when there are changes in political parties, when new regulations are added, or when economic instability occurs. Not all changes in a company’s external environment are threats: a company that has invested heavily in green technology, for example, may find itself an industry leader due to changing consumer demand.
Conducting an external environmental review requires companies to research and recognize factors beyond their control. The list should then be reviewed to see if there are any opportunities or threats. When an opportunity is found, the company should develop a strategy to exploit it. For example, if the economy is recovering from a recession, it may want to ramp up production so it doesn’t lose sales when demand increases. If threats or potential threats are discovered, the company should prepare plans to overcome or reduce the impact.
Regularly performing an external environmental review can help companies create or maintain a competitive advantage. It’s easy to overlook the entire external environment when focusing on day-to-day operations, so opportunities can be missed or threats can turn into nasty surprises. Depending on the industry, an annual review should be sufficient. If the industry is fast-paced, responsive to regulatory changes, or sensitive to a changing competitive landscape, however, a quarterly or semi-annual review should be pursued. Typically, an external environmental review is performed as part of a strengths, weaknesses, opportunities, and threats (SWOT) analysis, in which the company looks at the internal and external environments in the same relationship.
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