What is Environmental Analysis? Definition, Process, Tools, and Importance

What is Environmental Analysis?

An environmental analysis can be defined as the process by which the factors of the internal and external environment are monitored to find out the likely impact on the company’s performance. The factors usually have both positive and negative impacts on the firm’s performance.

A successful environmental analysis includes both internal and external environment analysis. In which doing internal environment analysis is to find out a firm’s relative strengths & weaknesses. And conducting external environment analysis is to find out potential opportunities & threats to the firm.

Such indicators greatly affect the firm’s efficiency, profitability, operations, decision-making, and overall performance, also significantly supporting the building of effective strategies. By analyzing the factors the firm is able to build strategies that align with the changing factors of the business environment.

The business environment does not remain static, it is highly dynamic as such a product, strategy, or marketing effort which is right for today might become obsolete tomorrow. So it is very important for the business manager to continuously analyze the environment, gather relevant information, and modify the strategies.

Process of Environmental Analysis

How to conduct an environmental analysis? Usually, it is a continuous process. The environment analysis process generally includes the four following steps.


The first step in the environment analysis is scanning the environment. Environmental scanning is about gathering information from the environment to assess its nature.

Environmental scanning helps to identify early signals of potential changes in the environment. Many firms also use special software and the internet for such scanning.


Monitoring is auditing the environment. It involves the observation of environmental changes to see the trend.

It detects meaning in different environmental events and trends. It helps to identify the effects of the environment in terms of threat and opportunity.


The third step, forecasting is about assessing what is likely to happen in the future. Scanning and monitoring are concerned with events and trends in the general environment at a point in time.

And, forecasting involves developing involves feasible projections of what might happen and how quickly. It is done on the basis of trends and changes.


Assessing determines the timing and significance of the effects of environmental changes and trends that have been identified. It specifies the implications of that understanding.

Assessing connects the data and information with competitive relevance. Equally important is interpreting the data and information to determine the trend as an opportunity or threat for the organization.

Techniques or Tools of Environmental Analysis

Effective environmental analysis is fundamental for making a marketing decision, future business planning, product abandoning or new product launching, and strategic management. The major tools for environment analysis are,

PESTLEG Analysis

PESTLEG analysis monitors the effects of factors on the general environment. It helps managers to understand the overall condition of the market consisting of the present and likely future. PESTLEG stands for,

Political Environment. Political environment refers to the government actions that affect the operations of a business. Managers need to give close attention to political factors to measure how government actions will affect the company.

Economic Environment. It refers to the nature and direction of the economy in which a company competes or operates. Factors such as GDP, inflation rate, employment rate, exchange rate, etc. are important to consider.

Socio-cultural Environment. People’s norms, beliefs, traditions, culture, education, languages, taste, preferences, etc. are important factors of this environment that a manager needs to pay close attention to.

Technological Environment. This environment talks about how advances in technology, level of technology, technology transfer, research & development budget, etc. affect the company’s performance.

Legal Environment. The legal environment of a business is composed of the constitution, business-related laws, courts, and law administration.

Ecological Environment. This refers to potential and actual changes in the physical or ecological environment. It also refers to the business practices that are intended to positively respond to these changes.

Global Environment. The global environment of a business includes relevant global markets, international political events, and critical cultural characteristics of global markets.

SWOT Analysis

SWOT analysis is the acronym for strength, weakness, opportunity, and threat. Its been a significant tool for environmental analysis since it gives about which the company has strengths & which not and which are opportunities and which are not.

Strength. Strength is the positive characteristic of the firm that may include strong strategy, strong human resources, production efficiency, etc. They are a success factor for achieving a competitive advantage.

Weakness. Weakness is the characteristic of the firm which might restrict the firm’s performance. Such as unclear goals, inferior products, weak promotion, etc.

Opportunity. An opportunity is a condition in the general environment that if exploited effectively, helps a company to achieve strategic competitiveness.

Threat. A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.

Scenario Planning

Scenario planning is a technique of depicting future possibilities and preparing accordingly. It is also called contingency planning.

Scenarios are carefully crafted stories about the future representing a wide variety of ideas and integrating them in a way that is communicable and useful. They are stories about how the future might unfold and affect business issues.

Industry and Competitive Analysis

Industry analysis is also known as the analysis of Porter’s five forces. It studies the environmental factors that directly affect business operations and performance. The five forces are,

Threats of New Entrants. This holds the premise that if there is easy access to new entrants in the industry, it is threatening to the existing companies.

Threats of Substitute Products. Availability of more substitute products in the market increases the higher competition as such price falls and most companies having fewer resources will fail to compete.

Bargaining Power of Supplier. A firm will have more bargaining power if there are more suppliers and suppliers will have more when they are few.

Bargaining Power of Buyers. The same is here, customers always want to buy products low-cost but quality products. Customers might have more bargaining power when there are more sellers with similar products and vice versa.

Competitive Rivalry. The company normally competes for the same market and customers. When there is a large number of competitors, the competition will be intense.

Importance of Environmental Analysis

Why environmental analysis is important? After reading the above discussion on environment analysis, you probably you have known why it is important to conduct.

It is obvious that when we do this analysis right we will get various insights into the what are companies’ capabilities to attract positive factors from the environment and what are to mitigate negative ones.

The major importance of environmental analysis may be pointed out as below,

  • Helps in identifying threats and opportunities.
  • Helps in determining strengths and weaknesses.
  • Helps to identify competitive advantage.
  • Helps to formulate new plans and strategies.
  • Fit for big companies.
  • Helps in plans and strategies implementation.
  • Helps to adjust to changing business environment.


Hence, environmental analysis is all about assessing the environment of a firm and analyzing likely situations that might or might not affect the firm’s existence. And, it is extremely important for companies to think about it to survive in this rapidly changing business marketing environment happily and successfully.

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