An environmental analysis in strategic management plays a crucial role in businesses by pinpointing current and potential opportunities or threats outside the company in its external environment. The external environment includes political, environmental, technological and sociological events or trends that can affect the business directly or indirectly. An environmental analysis is generally conducted as part of an analysis of strengths, weaknesses, opportunities, and threats (SWOT) when a strategic plan is being developed. Managers practicing strategic management must conduct an environmental analysis quarterly, semi-annually, or annually, depending on the nature of the business's industry. Being able to identify events or conditions in the external environments helps businesses achieve a competitive advantage and decrease its risk of not being prepared when faced with oncoming threats.
The purpose of an environmental analysis is to help in strategy development by keeping decision-makers within an organization informed on the external environment. This may include changing of political parties, increasing regulations to reduce pollution, technological developments, and shifting demographics. If a new technology is developed and is being used in a different industry, a strategic manager would see how this technology could also be used to improve processes within his business. An analysis allows businesses to gain an overview of their environment to find opportunities or threats.
A SWOT analysis is done as part of a business's strategic planning process. The internal analysis reviews the business's strengths and weaknesses, while the external environmental analysis takes a look at the opportunities and threats. The role of environmental analysis in strategic management is to find any potential opportunities and threats, and to create a plan to take advantage of opportunities or to avoid threats. If a threat cannot be avoided, such as a shifting demographic that is causing a decline in sales, then a plan should be created to minimize its effects. For instance, the business could develop a product to target the new demographic majority.
How often this type of analysis should be conducted depends on the nature of the industry. If the industry is fast-paced or susceptible to changing legislation, then the business should consider doing its analysis quarterly or semi-annually. An industry that does not face constant changes or is not sensitive to changes in the external environment may only need an annual analysis. A business that conducts an environmental analysis often is more aware of opportunities opening and can take advantage of them quicker than can its competitors. Increasing how often an environmental analysis is conducted can also help the business see potential risks sooner, allowing it additional time to develop a strategic plan to avoid or decrease its potential affects.