Performing an environmental analysis is done by listing all possible external factors that could affect the business, reviewing these factors to find opportunities or threats and preparing an impact report with an action plan. An environmental analysis looks at the political, environmental, social and technological changes or events that a business cannot control. Their potential impacts on the business should be reviewed to see if the changes or events are potential opportunities or threats. The business then should develop a strategy to take advantage of opportunities, or an action plan to overcome or avoid potential threats.
Listing all possible external factors is the first step in performing an environmental analysis. These factors are categorized as political, environmental, social and technological. Examples of external factors include pending governmental legislation, tightening of environmental protection regulations, shifting of demographics and the release of new inventions. For instance, the introduction of DVD players caused VCRs to gradually become obsolete. VCR manufacturers who quickly adjusted to this new technology were able to take advantage of the opportunity to become market leaders.
Reviewing each external factor on the list should be done next to separate the opportunities from the threats, or to see if a particular factor possesses both qualities. Opportunities are ongoing external events or situations that a business can use for repositioning, growing or branding purposes. If a technological advancement has been announced in one industry, the business can see if adopting that technology presents an opportunity for it to create a competitive advantage within its own industry. Threats are an obstacle or trend that can lead to a loss of market share or profits. For example, if governmental legislation is about to pass that will require the business to invest in expensive equipment, this would fall into the threat category.
Preparing an impact report is the final step of performing an environmental analysis. This impact report separates the external factors into the categories of opportunities and threats, and then lists them in the order of importance. The opportunities should include how the business will take advantage of the opportunity, associated costs and what would happen if no action is taken. For each factor listed as a threat, it should discuss why it is a threat, the possible damage if no action is taken and a plan to either avoid or reduce its effects on the business. This section of the environmental analysis also should discuss the probability of each event occurring and note any time restraints for taking action.