When the world changes, some businesses boom while others go bust. The difference between the two is how well they understand their environment. Blockbuster turned down a chance to buy Netflix. Now their business is history. Environmental analysis is often considered one of the best ways to understand your industry and preempt disaster.

Retailers who were careful to study their environment pivoted to ecommerce in the pandemic and thrived. Mailchimp responded to the 2008 recession with a free version of their product, and their revenue soared. An environmental analysis helps you master your business environment so you can meet customers’ evolving needs and stay ahead of the competition. Here’s our guide to this essential strategic tool.

What Is Environmental Analysis?

An environmental analysis (also known as environmental scanning) is a process of investigating the external factors that affect your business. This includes factors that have a direct impact on your business (e.g. tax regulations) and factors that have an indirect impact (e.g. conflict in the country where your suppliers are located).

The goal is to develop a bird’s eye view of your external environment so you can anticipate threats and identify opportunities. Here are some examples of environmental factors that have had massive impacts on all kinds of businesses in recent decades.

  • 2008 financial crisis
  • The introduction of smartphones
  • Disruptive business models e.g. ride-sharing, streaming, SaaS
  • China-US trade wars
  • COVID-19
  • Growing concerns about environmental issues
  • Advances in artificial intelligence

An environmental analysis can also include more localized aspects of the external environment such as foot traffic outside your store, new software available in your industry, or TikTok trends that are popular with your customers.

What Is the Purpose of an Environmental Analysis?

An environmental analysis can be used by various functions in your business for different purposes including the following areas.

Strategic Planning

Senior management can use environmental analysis to help inform the business goals and priorities they set during the strategic planning process.

Workforce Planning

Studying external factors like the job market, industry trends, and social attitudes to work can help human resources professionals design policies that improve hiring, retention, and productivity.

Marketing Strategy

Marketers can use an environmental analysis to inform their branding and marketing strategies. Relevant external factors include demographic shifts, cultural trends, social media usage patterns, and competitor marketing strategies.

Product Development

The product development team’s primary goal is product market fit, but without an understanding of the market, that goal is difficult to achieve. An environmental analysis can help you identify the underserved needs of your target customer, and the solutions you will compete against.

Research and Development

An environmental analysis can surface emerging trends and technologies that could impact your business. This should inform how you prioritize your R&D budget.

How to Conduct an Environmental Analysis

An environmental analysis is a simple concept but, in practice, it can be a daunting task to take on. These six steps make it easy to master the environmental analysis process and yield effective results.

1. Plan Your Process

Consider the scope and purpose of your environmental analysis. What time, budget, and resources are available? Who are the stakeholders? What will be the output? You can do a fifteen-minute environmental analysis on the back of an envelope, a months-long analysis involving expensive consulting firms, or something in between. Make a plan that suits your business needs.

2. List the Factors You Want to Analyze

Make a list of the external factors that may have an impact on your business. You can use a PESTLE analysis to help you with this step. PESTLE is an acronym for the following six categories.

P Is for Political

Political factors include political stability, red tape, tax regulations, trade agreements, consumer protection laws, immigration policies, and the like. For example, if you sell cars in the UK, you should closely track tax breaks for electric vehicles and be prepared for changes.

E Is for Economic

Economic factors include interest rates, economic growth rates, exchange rates, inflation, wage growth, and the cost of fuel. For example, if you sell French wine in the US, one of the economic factors you will want to watch is the Dollar-Euro exchange rate.

S Is for Social

Social factors include demographic trends, migration patterns, wealth distribution, cultural movements, popular lifestyles, and attitudes toward things like the economy, health, and the environment. For example, if you sell meat alternatives, you should note that there is a trend away from processed foods.

T Is for Technological

To identify relevant technological factors in this category, ask yourself:

  • What new technological breakthroughs could threaten my business?
  • How are other businesses using emerging technologies in their products, marketing, business operations, and customer service?
  • Have any new, innovative products been launched in my industry?
  • What technological advancements are attracting a lot of venture capital or R&D investment?

For example, if your competitors have an app, an AI customer service chatbot, or accept Venmo payments, it is worth considering whether you should do the same.

Legal factors include new regulations in areas like employment, consumer protection, environmental reporting, health and safety, and data privacy. For example, when Europe introduced the GDPR data privacy rules, companies had to put in a lot of work to become compliant or risk hefty fines.

E Is for Environmental

Environmental factors include climate change, natural disasters, waste disposal laws, consumer attitudes toward sustainability, and carbon reporting laws. For example, if you run a restaurant, changing weather patterns may make it more difficult to acquire fresh produce.

PEST and STEEPLE

Some businesses prefer to use a PEST analysis – a more focused method that excludes legal and environmental factors – or a STEEPLE analysis, instead of a PESTLE analysis. STEEPLE covers all the same categories as a PESTLE analysis as well as a seventh category: Ethical factors.

These could include:

  • your suppliers’ labor practices
  • gentrification in your business’s neighborhood
  • a competitor’s focus on Fair Trade

Competitor Analysis

Another important aspect of the external environment is your competitors. To conduct a competitor analysis :

  1. Make a list of your direct and indirect competitors.
  2. Identify their target customers.
  3. Determine the four Ps for each competitor: Products, Pricing model, Promotion (i.e. marketing strategy), and Place (where they are located physically or digitally).

A competitor analysis will likely overlap with a PESTLE analysis. For example, some products and marketing strategies fall under technological factors.

3. Gather Your Data

There are lots of ways to gather data about the external environment. The data-gathering method you select should be informed by the scope of your environmental analysis and the resources available.

Here are some relatively accessible and affordable data sources:

  • Your own experience
  • News articles
  • Conversations with people in your business e.g. legal, HR, sales, and policy teams
  • Conversations with industry experts
  • Competitor websites, social media pages, and annual reports
  • Industry publications and conferences
  • Industry association websites
  • Websites of regulatory agencies, political parties, and government departments
  • Reports from consulting firms
  • Google Trends
  • Customer reviews and complaints
  • Pop culture sources e.g. television, computer games, memes

If you have more resources available, you can also use:

  • Mathematic modeling
  • Custom surveys
  • Focus groups
  • Market research firms
  • Third-party social media monitoring service

4. Determine Impacts

Once you’ve done your research, make a note of how the key factors in your list impact your business and how they might affect it in the future. You can also think about what your business would need to do to mitigate or capitalize on those impacts.

5. Organize the Results

You will now probably have a lot of information. The next step in your environmental analysis is to organize the information so that it’s easier to engage with. One way to do this is with a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Put the factors you’ve identified with your environmental analysis into those four categories based on their current or potential impacts.

It can be useful to rank the threats and opportunities by magnitude i.e. how big of a risk or opportunity is this to your business? A law that prevents you from selling your product is a much bigger risk than, say, a small increase in your business’ rent.

If the factor you’re examining is something that may happen in the future you can also rank it by likelihood. For example, a major recession could be extremely harmful to your business but perhaps the economic outlook is currently sunny.

6. Decide on Your Next Steps

The final step in your environmental analysis is to use the information that you have gathered to produce your output e.g. a presentation for a strategic planning meeting or a full action plan.

You may want to share insights with relevant departments. For example, changes in the job market could be reported to HR while cultural shifts could impact marketing.

Ultimately, the goal is to figure out how to use your environmental analysis to grab hold of opportunities, protect against threats, keep up to date with customers’ needs, and stay ahead of the competition.

Environmental Analysis Examples

Here are three examples of an environmental analysis to demonstrate how this tool can be applied.

Example 1: Electric Cars

EV USA, an industry association representing businesses in the electric car industry, decides to conduct an environmental analysis to help its members prepare for the future. It takes the following steps:

  1. Planning: It sets aside $6,000 and three months. The environmental analysis will be conducted by an EV USA business analyst with help from other departments. The output will be a report which will be presented to the board, the CEO, and heads of department. The communications team will produce an abridged version for a newsletter that goes to members.
  2. Determining factors to be analyzed: The analyst decides to use the PESTLE method for the environmental analysis.
  3. Gathering data and determining the impacts: The analyst speaks to EV USA members about the challenges they face, their concerns about the future, and how these factors will impact their businesses. He talks to their suppliers and customers and EV USA’s contacts in politics and local government. He combines this data with industry reports from McKinsey and Deloitte, consumer surveys by Ipsos Mori, and annual shareholder reports from major industry players.
  4. Organize the results: The business analyst organizes the findings from the environmental analysis using a SWOT analysis.
  5. Build an action plan and execute: The analyst teams up with executives, along with help from various colleagues with expertise in all of the most important business functions, to build out an action plan. The plan includes outlines of how to exploit the business’ most valuable opportunities and strengths, how to prepare for its greatest threats, and how to bolster its weaknesses. Executives and managers then put the plan into action, training each and every key employee on their new responsibilities.

Example 2: Brexit

Imagine you are a wine retailer in the United Kingdom and the country has just left the European Union. The company is conducting a strategic planning session to decide how to adapt to this change.

You’re given short notice for the session so you do a quick environmental analysis using the PEST method and your existing knowledge. You identify the four most important environmental factors that will impact your business as well as changes you can make in response.

 P.E.S.T.  Factors & Impacts
Political: Trade policies Brexit means there will be trade restrictions with the EU. This will impact margins. You suggest considering targeting higher-income customers with more luxury products to deal with this change. The UK is also making new trade deals with countries outside the EU. This creates an opportunity to access wine from other locations at a better price. You suggest a cost-benefit analysis of this opportunity.
Economic: Exchange rate volatility Brexit has impacted exchange rates. You suggest that the legal team should look into different types of supplier contracts that would mitigate this change. Focusing on higher-income customers will also help with this problem as you can increase your margins to avoid losses.
Social: Attitudes toward Brexit  Your target customers voted to remain in the EU and want to see Europeans in the UK treated with respect. You have many European employees who feel they are not welcome in the UK and may go back to their home nations. You suggest reaching out in support of those employees in order to avoid losing valuable talent. You suggest incorporating this sentiment in your marketing materials.
Technological: UX There are no Brexit-related technological concerns but you’ve received feedback from customers that aspects of your website are not user-friendly. You’ve also noticed that your competitors have an app. You suggest hiring a UX expert and investing in the development of an app.

Now that you have worked out the most important factors that will impact the business, it’s time to write up an action plan or a similar document to help inform the leadership of your findings.

Example 3: Meta

For this environmental analysis example, imagine you are an investor considering buying shares in Meta. You want to understand how the business environment impacts the business to determine if it is a safe investment. You identify the biggest risks using a PESTLE analysis, as follows.

Political Economic Social Technological Legal Ethical
Factors  Political will to limit big tech’s power Reliance on ad revenue, rate cuts, fear of recession Worsening attitudes toward Meta and social media in general, data privacy fears Industry investment in AI, rise of competitor apps Data privacy issues, rise of antitrust lawsuits Harmful impact of social media use, AI ethical concerns
Impact Potential fines, restrictive policies, negative publicity Revenue sensitivity to economic downturns Users leaving Facebook and Instagram or reduced usage hours Competitors siphoning userbase and funding Legal expenses, potential fines Negative publicity
Time frame Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing
Importance Vital Important Existential Moderate Moderate Low
Likelihood High Moderate High Moderate High High

Based on your environmental scanning, and especially the political factors and legal factors, you decide Meta is too risky an investment for your personal risk profile.

Tips for an Impactful Environmental Analysis

For an environmental analysis that really counts:

  • Be resourceful. Use internal expertise and resources as well as freely available data such as Google Trends, government statistics, and corporate earnings calls.
  • Talk to different people. A range of perspectives will yield more thorough results and a quick chat doesn’t cost a thing.
  • Be a paranoid optimist. Businesses need optimism to keep pushing forward but don’t ignore negative indications.
  • Be skeptical. Popular wisdom is not always accurate and no one really knows the future. Remember the ‘exodus from the cities’ during Covid? It didn’t really happen.
  • Repeat your environmental analysis at regular intervals – the market is always changing.
  • Stay informed between environmental analyses by subscribing to industry newsletters, talking to customers, reading financial news, or joining your local chamber of commerce.
  • Combine your environmental analysis with tools like SWOT analysis, Porter’s Five Forces, and competitor analysis to gain a fuller picture.

Should You Use Environmental Analysis?

Most business operators will naturally keep an eye on what’s happening in their industry and the general economy, but without a thorough, structured investigation you could miss out on opportunities or fail to prepare for devastating challenges.

The trends we hear about and see on the news often lack nuance and the biggest threats can be hidden in plain sight. An environmental analysis ensures you’re operating without a blindfold, so you can navigate your way to business success.