External Environmental Analysis: Meaning, Features, Need & Importance

Meaning of External Environmental Analysis, The word “External Environment Analysis” has been made up of two words ‘External Environment’ and ‘Analysis’. The first word ‘External Environment’ Means elements or factors outside the institution of the entrepreneur, like – economic, social, cultural, political, physical, educational, technical, religious, ethical and international, etc. which affect his business.

External Environmental Analysis Meaning Features Need & Importance
External Environmental Analysis

The other word, ‘Analysis’ means reactions towards those factors or elements or issues, neglect thereof or taking of decisions by predicting the opportunities.

Hence, in composite form, external environment analysis means such process through which decision is taken, by assessing economic, socio-cultural, political, physical, educational, technical, religious, ethical and international environment or factors or element, or issues. and also opportunities.

External environmental analysis or evaluation is a process through which strategic planner (entrepreneur) evaluates economic, social, official, supply, technological and market conditions to determine the opportunities and challenges for their enterprise and according to which he adjusts his strategy and objectives.

Thus, external environment analysis is that process through which the entrepreneur determines opportunities, threats, reactions, neglects and challenges by evaluation of those factors and in consonance whereof, adjusts his strategies and objectives.

Related: 6 Main Aspects of External Environmental Analysis (Explained).

Features of External Environmental Analysis

Following Characteristics of external environment analysis may be observed by studying and analyzing its meaning.

1. Continuous Process

External environment analysis is a continuing process because till an entrepreneur will not keep the continuous watch on the changes happening in the environment, he will not be able to have knowledge about the threats and challenges.

2. Determination of Opportunities and Challenges

By external environment analysis, the entrepreneur evaluates all factors and parties to determine the opportunities and challenges for his enterprise, so that he may face the challenges of some factors and their tendencies.

Related: 31 Contents & Subject Matter of Project Report (Step by Step).

3. Adjustment of Strategies and Objectives

In the external environmental analysis, the entrepreneur evaluates those factors to determine opportunities, threats, reactions and challenges for his enterprise.

Thereafter, he adjusts his strategies and objectives in accordance with those factors.

4. Inner Knowledge Process

External environmental analysis is a process through which environmental conditions are known on the one side, knowledge is also gained about future possibilities and hidden opportunities.

As a result, the decision making and making adjustments of strategies and objectives, by the entrepreneur become easy.

Related: 25 Aspects and Coverage for Appraisal of Project Proposals.

5. Opportunities and Threats

External environmental analysis is the opportunity and threat analysis, ‘meaning thereby that the external environmental analysis provides the opportunity to the entrepreneur that presently the circumstances are favorable and hence decision may be taken quickly and may be implemented also, so that profit may be earned.

On the contrary, the external environmental analysis may also pose the threat that the circumstances are not favorable and hence caution and care be exercised, otherwise, losses may occur.

6. Goal Orientations

Through external environmental analysis, the entrepreneur makes efforts to know the future possibilities and their real effects or makes efforts to achieve his goal by searching business opportunity with the help of external environmental analysis.

Related: Top 10 Characteristics of Good and Ideal Project Planning.

Need and Importance of External Environmental Analysis

For an entrepreneur, continuous study and evaluation of external environmental analysis are essential.

External Environmental Analysis Meaning Features Need & Importance
External Environmental Analysis

For the entrepreneur analysis of external environment is necessary, so that he may know.

  1. Which of the environmental factors are posing threats to the present strategy and obtainable objectives of the entrepreneur?
  2. Which of the environmental factors are presenting opportunities, which may be availed by making necessary adjustments in the present strategy?

Importance and necessity of external environmental analysis may be easily understood with the help of following points.

1. Success of Entrepreneurship

For the success of an enterprise, advance evaluation of the far-reaching favorable effects and ill effects of the external environment and its factors is necessary.

If such advance evaluation provides some specific knowledge, the entrepreneur gets alert about them and tries to adjust his decisions, accordingly.

Related: 14 Nature of Business Environment (Explained).

2. Formulation of Viable Plans

We have studied that the business environment is dynamic, and not static.

Hence, the entrepreneurs should effectively assess and analyze it to give practical and functional shape to his plans. 15 Essential Elements of Creativity in Entrepreneurship.

3. To Create Measures for Competitive Environment

The competitive environment is also an essential part of the total environment, which cannot be left unseen.

Hence, it is essential for the entrepreneur that he should study and analyze the external environmental factors, so as to work out measures against the strategies of their competitors and to adopt counter Strategies.

Thus, external environmental analysis is necessary for working out strong measures against the competitors.

Related: Top 12 Techniques of Decision Making (Step by Step).

4. Formulation of Successful Plans

Components of planning include objectives and goals, policies, Budget, Time, standards and strategies.

The forecast is the base of planning.

Hence, for the preparation of successful business plans of the entrepreneurs, determination of various components, basis and their effects is necessary.

Not only that, but the study of factors of the external environment is totality is also essential.


5. Helpful in Selection of the Best Alternative

External environmental analysis and investigation not only help the strategic decision makers in restricting the volume of available alternatives but also in removing the is irrelevant alternatives, by taking future opportunities and challenges and threats into consideration.

The best strategy cannot be easily identified, but unwanted alternatives may be removed to a large extent and the best available alternative and may be selected through external environmental analysis and investigation.

Related: 12 Main Characteristics of Decision Making (With Examples).

6. Use of Profit Opportunities in Business

The external environmental analysis provides information on various opportunities of gaining profit in business.

For that, it is essential that the entrepreneur may remain alert towards, that environment and factors.

Similarly, the entrepreneur should have knowledge about economic events, social changes, government policies, and foreign Corporation, etc. so that various available opportunities may be availed for earning optimum profits.

Such knowledge maybe also make him alert towards future challenges and threats.

Thus, the entrepreneur may use several opportunities for Profit in his business through external environmental analysis.

Related: 13 Features & Nature of Business Environment (Updated).

7. To Provide Permanency to Possibilities for Sale of Products

In the external environment and its factors, the products, production procedure, and methods, cost structure, marketing strategies, distribution chain, technical and sale methods of the competitors are also studied.

By analyzing these, the possibilities of the sale of products may be provided permanency, because by such analysis the entrepreneur becomes capable to easily take strategic decisions.

8. Leadership of Market

External environmental analysis is also required because through it is the entrepreneur get knowledge about new products and new services available in the market, fashion, likings of the consumers, new techniques of production and methods, etc.

With the use of such knowledge, the entrepreneur may increase his sales by efficiently leading the market, which will surely result in good profits to him.

Bonus: 18 Major Factors Affecting Capital Structure (Complete List).

9. Vigilance Towards Future Threats and Challenges

The external environment analysis also provides advanced Information about various future threats and challenges to the entrepreneur and make him alert.

High management of the corporation (entrepreneur) and his planning department continuously keep watch on happenings in the markets, and which threats and opportunities are waiting for him.

10. Permanent Residence of the Institution and Entrepreneur

External environment analysis by any entrepreneur is essential to ensure stable existence of his institution, the reason being that by doing so, he keeps watching on the environment and its factors and makes necessary adjustments in his Strategies and objectives.

If he does not do so, his own existence or of his institution will gradually come to an end.

Thus, you all know the External Environmental Analysis Meaning Features Need & Importance.

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