What Is an Environmental Analysis for a Business?

by Devra Gartenstein - Updated July 09, 2018

Your business operates in a landscape of overlapping ecosystems. The better your analysis of your business environment, the more effectively you'll be able to position yourself to take advantage of opportunities and navigate potential threats. A PEST business environment report systematically evaluates your position relative to political, economic, social and technological factors. Other types of environmental analyses can also include legal and environmental considerations and evaluation of the strengths and weaknesses of your company's internal environment.

Political Environment

If you're following the convenient acronym PEST, your analysis of your business environment will start with its political landscape or the laws and regulations that govern and shape the ways you'll do business. You may face obstacles getting your products licensed, or you may have to pay prohibitive fees for the licenses you'll need to operate. Consequently, you may deliberately choose to build your business model around products and services that are easy and inexpensive to license.

Economic Environment

The opportunities and obstacles facing your business are also rooted in current economic factors. These environmental variables influence whether your customers have the cash to pay for your offerings and accessibility of working capital. Your economic environment also determines whether materials and labor are expensive or affordable and whether the supplies you need are readily available.

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Social Environment

Virtually all businesses depend on marketing or reaching out to customers to generate interest in your products and your brand. The social environment in which your company operates determines how you can most effectively craft your message so customers will respond and buy. If your company specializes in gourmet food products, you'll be most successful in a social environment with affluent customers, and if you sell toys, you'll thrive in a social environment with plenty of families.

Technological Environment

Your company's technological environment influences its capabilities for manufacturing and output. Equipment that can create 100 units per hour will be more cost-effective than machinery capable of making only 50 pieces per hour, as long as the cost of the equipment itself isn't prohibitive. Technology also comes into play in your marketing efforts, affecting your social media strategy and your platform for showcasing and selling your products or services online.

Benefits of Environmental Analysis

Environmental analysis helps you make significant decisions for every aspect of your business. For example, let's say you're starting a business making dietary supplements. Your political environment will determine what health claims you'll be allowed to make on your product packaging, and what health department regulations your facility will have to follow. Your economic environment will play a part in determining how much to charge for your offerings relative to how much your customers can afford to pay and how much it will cost to produce your supplements. The social environment determines how much demand there is for supplements versus traditional medication. Your technological environment will affect whether there is equipment available to manufacture your supplements, or whether you'll have to design your machinery.

About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.

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