Why is it necessary to understand a companys external environment before engaging in internal analysis?

Understanding the environment your business operates in is a key part of planning, and will allow you to discern the threats and opportunities associated with your area of business.

An external analysis looks at the wider business environment that affects your business.

An internal analysis looks at factors within your business such as your strengths and weaknesses.

Examining your internal and external analyses together gives you a complete picture of your current situation and the steps you can take to plan your marketing.

PESTLE external analysis

A PESTLE analysis helps you to identify the main external opportunities and threats in your market:

• Political changes such as trade agreements between countries 
• Economic factors such as interest rates, exchange rates and consumer confidence
• Social factors such as changing attitudes and lifestyles, and the ageing population
• Technological factors such as new materials and growing use of the internet
• Environmental factors such as environmental law and impact on the environment
• Legal factors such as new and existing legislation 

SWOT internal analysis 

You also need to understand your own internal strengths and weaknesses. 

A SWOT analysis combines external and internal analysis to summarise your Strengths, Weaknesses, Opportunities and Threats. For example, a new business may note the following:

• Strength: enthusiastic employees or a unique product
• Weakness: no existing customer base and limited finances
• Opportunity: potential customers with problem the product solves, interested investors
• Threat: competition from established businesses with a bigger budget

You need to look for opportunities that play to your strengths. You also need to decide what to do about threats to your business and how you can overcome important weaknesses.

For example, your SWOT analysis might help you identify the most promising customers to target. You might decide to look at ways of using the internet to reach customers. And you might start to investigate ways of raising additional investment to overcome your financial weakness.

To find out more about strategic analysis, see measure performance and set targets.

Invest NI's Business Direction Tutorial includes a chapter on how to use SWOT analysis to assess your business. See the video below:

Why do we need to analyze the internal and external environment?

Why is it necessary to analyze the external environment?

Why is internal and external environment important in strategic management?

Why is it important for managers to understand the external environmental components?