What is an Environmental or Analysis?
An environmental or “external” analysis evaluates how trends and high-level factors could affect the potential for profits within a given industry by tracking their influence on regulation, industry structure or in the ability to differentiate products.
Trends, as we use the term in our framework, are factors that move in a well-known direction.
For example, we all know that computing power in smartphones is increasing, that consumers are increasingly more interested in electric vehicles, that tobacco sales are shrinking and that renewable energy is getting cheaper.
All of those are trends where we know clearly where they are heading.
While you may not be able to quantify the influence that a particular trend will have on a market, you can clearly see its direction. You can see whether it is going up, down or if it has stalled.
While Porter’s five forces analysis offers a snapshot of a market at a given point in time, an environmental analysis
An environmental analysis works better when used in combination with a scenario planning exercise, which focuses exclusively on analyzing the potential impact of unknown variables or “uncertainties” on the future of an organization.
Together, both analyses provide a more rounded view of the future of a market or industry appropriate for strategy purposes.
Conducting an Environmental Analysis
The first step in conducting an environmental analysis is to identify the factors that will be considered in the analysis, with those factors being identified, the next step is to collect the data about those factors.
Let’s tackle both at the same time.
Professors Michael Lenox and Jared Harris of the Darden School of Business at the University of Virginia classify the factors that need to be included in an environmental analysis as:
1. Demographic trends: How the distribution of the consumer population is changing within an industry. This part analyzes the age distribution of each buyer group, how groups are segmented, and their geographic migration patterns among other factors.
Specific data about this factors may include:
- Population growth and death rates
- Trends in age distribution
- Migration and immigration patterns
- Population segmentation groups
2. Sociocultural influences: How the factors that affect consumer choices at the social level are evolving. For example, things like personal values, beliefs, behaviors and sexuality among others that affect how consumers want and do not want to be seen.
Data to include in the analysis:
- Trends in lifestyle
- Fashion trends
- Evolution of top social issues
- Evolution in ethnic and racial differences
- Media views and influence
3. Technological developments: What are the technology trends that could affect how customers choose and buy products? What convergence of technologies is driving changes in customer behaviors in ways never seen before?
Specific data to include in the analysis:
- State and maturity of existing technologies
- Evolution of promising emerging technologies
- Public and private research funding
- Status of intellectual property (licensing deals and patents)
- Regulators views about the technology
4. Macroeconomic impacts: How macroeconomic factors such as inflation, exchange rates, employment, international trade and others may have an impact on the margins of the industry.
Data to include in the analysis:
- Economic situation at home and overseas
- Status of trade agreements and negotiations with potential markets internationally
- Status of taxation issues
- Demand seasonality
- Markets volatility due to international or internal conflicts
- Macroeconomic effects on the industry and particular markets
5. Political-legal pressures: What’s the state of the regulatory environment, and what are legal bodies and politicians thinking about how the industry should evolve and how it should be regulated?
Specific data about this factors may include:
- Current and pending relevant legislation
- Political and social pressures
- Status of public funding for projects and technology
- Current influence of lobbyists and advocacy groups
6. Global trade issues: How globalization and international trends are affecting local competition and profitability.
Specific data to include in the analysis:
- Trends in interest and exchange rates
- Status of international trade and monetary policies
- International advocacy and pressure groups
- Globalization trends
- Status of international regulation
Every industry is different and so is the relative influence that each factor has on the incumbents’ businesses.
An environmental analysis may take some work, but it will provide you with the necessary context to help explain where things stand today, but more importantly where they may be tomorrow.