What Is an Environmental Analysis for a Business?

by Renee O'Farrell; Updated September 26, 2017

Environmental analysis is relatively qualitative and involves the identification of and analysis of environmental variables, which affect the business. Some frameworks of environmental analysis have received large amounts of attention in the world of business management literature, such as SWOT analysis and PESTEL analysis.

Definition

Environmental analysis for a business looks at the factors inherent in a business’s environment that may have some impact thereof. This type of analysis is relatively qualitative and involves the identifying, scanning, analyzing and forecasting of the environmental variables. Some frameworks of environmental analysis have received large amounts of attention in the world of business management literature, such as SWOT analysis and PESTEL analysis.

Identifying

To measure and/or improve the relative position of the business to the intrinsic environmental factors, one must first identify those factors that affect the business. This will need to be done at various internal levels, the company level, the regional level, the domestic level and the global level. While several frameworks exist as an aid to this step of identification (such as SWOT and PESTEL), they are merely tools that remind the identifier to consider certain types of factors. A good identification of environmental factors can be had as the result of a good brainstorming session with or without such frameworks. Those frameworks exist because of the ease of deployment and should be consulted, flexibly.

Scanning

This step in environmental analysis can be somewhat confusing. How does one scan for qualitative factors that have already been identified? Scanning, in the context of environmental analysis, refers to the process of distinguishing which of the identified factors have the most effect. Not all of the factors identified in the first step will carry the same weight, and the recognition of environmental factors most significant to the business will assist in rendering a course of improvement.

Analyzing

The next step in environmental analysis is to analyze the effect the relevant environmental variables have on different levels of the business, including the business at large. There are a plethora of tools available for this type of analysis, ranging from scenario building to benchmarking to the Delphi technique. Which every tool, or tools, chosen, the information will be collected and analyzed in similar fashions. Brainstorming, reviewing historical data and polling department heads and managers serves to collect information that will be used for statistical analysis; types of analysis include mean, mode, correlation and regression, among others. The methods of statistical analysis chosen will vary based upon what is being analyzed and the form held by the data itself. Some useful methods of analysis can be found in the techniques of company ratio analysis.

Forecasting

Once the environmental variables have been identified, deemed significant and analyzed, it becomes necessary to forecast the effect that said variables would have in the future. This is the primary function of the analysis of current and historical data. By looking at the trend each significant environmental variable is forecasted to take, a strategy report can be created, from which management can develop a business strategy in response thereto.

About the Author

Renee O'Farrell is a freelance writer providing valuable tips and advice for people looking for ways to save money, as well as information on how to create, re-purpose and reinvent everyday items. Her articles offer money-saving tips and valuable insight on typically confusing topics. O'Farrell is a member of the National Press Club and holds advanced degrees in business, financial management, psychology and sociology.