Environmental business analysis is a catchall term given to the systematic process by which environmental factors in a business are identified, impact is assessed and a strategy is developed to mitigate and/or take advantage of them. While frameworks do exist to aid in environmental analysis, it is important to understand that they are simply frameworks to orient the user toward a more precise understanding of the business environment; they are by no means necessary. Rather, it is important to understand the business environment, the universal processes used in analysis and how analysis is converted into strategy.
- Any business manager should be able to analyze the environment in which the company does business. The general process used to analyze the business environment has four basic steps. First, the environment is scanned for environmental factors. Next, the relevant factors are culled and monitored. Then, those factors are analyzed for impact. Lastly, scenarios are forecast based upon the environmental factors identified and strategies developed accordingly. Further, as strategies are implemented, the business environment is monitored so that any unforeseen changes can be accounted for.
- Identifying environmental factors is most commonly done by brainstorming. All environmental factors are not always obvious to everyone and the more people included, especially in this initial brainstorming, the more accurate the environmental profile developed will be. Common environmental factors include new tax laws, tariff limits, export laws, consumer trends, developing technology, new replacement products (i.e., the iPod to the CD player), laws concerning emissions, a new competitor, etc.
- Several popular frameworks exist as an aid to identifying environmental factors and are frequently used together. The first is PEST or PESTEL analysis, which looks at the political, economic, social and technological factors affecting a business; sometimes environmental and legal are included. Secondly, SWOT analysis is used. This is a framework that looks at the strengths, weaknesses, opportunities and threats affecting a business, both internally and externally. Lastly, the Five Forces are considered: internal forces, external forces, competitors, new entrants and producers of complementary products/services.
- Only the most relevant environmental factors identified should be given further analysis. All factors are not equally relevant; for example, certain tax laws will affect the business but really require little additional analysis compared to the threat posed by a competitor. Further, it is important to try to quantify the effect of the environmental factors identified. Quantification will allow the true impact to be assessed and compared historically and in the future.
- After carefully identifying and quantifying those environmental factors most relevant to the future success of a company, assumptions are made regarding the future development of those factors and a strategy formed. Methods to accomplish this will vary, but all good plans will have the common feature of a monitoring/feedback mechanism and a system to update the strategy accordingly (i.e., a monthly review).
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