External analysis

External analysis is the second half of the Strengths Weaknesses Opportunities and Threats (SWOT) analysis.

The SWOT analysis is the central stage of the strategic planning process. Another name for this look outside is ‘environmental scan’.

Who does the environmental scan?

A number of techniques for forecasting trends and for the analysis of one’s industry are available. I would urge caution however. Some of the providers of these tools believe their methods cover the complete strategic analysis exercise. Some even imply that using their approach will produce the strategic plan!

These methods cover only parts of the strategic planning process. Other elements go to make the complete picture.

In general, it will be the planning assistant and the members of specialist working parties who apply these techniques. The managers on the strategic planning team will not use them.

What to include in the external analysis

The analysis should review five areas. The organization may find issues of strategic importance in any one of these areas. The first four are those any organization should review. The fifth looks at the particular industry or community sector in which the organization operates.

The five areas are -

  • Politics
  • Economy
  • Society
  • Technology
  • Industry

External analysis - making sense of a confusing world

The external study aids the enterprise to adapt to its context. The analysis needs data. This can range from chance observations to formal industry research.

How top managers see the environment influences the approach they take to the external analysis.

There seem to be two dimensions to this -

  • The extent to which the environment appears to be understandable or not
  • The extent to which the organization feels a ‘victim of circumstances’ beyond its control, or of an ‘actor’ able to influence its environment

Placing these two aspects along the vertical and horizontal axes, we get this diagram.

Front of your nose

With little effort defining needs for external analytical information, approaches are usually informal. Personal encounters and impressions count more than gathering hard about what is going on in the world. Seems cost-efficient much of the time; however, a high price can be paid for ‘inattention’ to possible major changes.

Our minds are made up

Environmental scanning involves using the existing knowledge of the context. These firms follow the crowd in trying to understand the outside world. Focus is industry specific. Current standards of practice in the industry govern scanning behavior. There is little active seeking of different perspectives, from others in the external world. There may be some extensive searching of external, industry relevant sources of knowledge. This may include databases, trade journals, professional body news, and professional development.

Leap before you look

A kinder way of interpreting this approach is to see the organization acting courageously, despite it difficulty in making sense of the broader external environment. It is an ‘action learning’ mind set. Trying things out and learning from their consequences. In contrast to the minds are made up organizations, leapers do not let industry norms play an excessive role in what they will try.

Seek with an open mind

These explorers have done their homework, and set out to search for information with a plan in mind. They actively go on excursions into the outside world armed with well thought out queries. They are also open to encountering the unexpected, and then gathering hard data about what they find.

What is the best approach to external analysis?

It might seem that the open-minded explorers are the top of the class. It is important to realize that each of these ways of reviewing the environment have their pros and cons. Approaches should suit to the organization. Factors that might affect choice include -

  • Turbulence of the context they are scanning
  • Cost efficiency of the method in relation to the resources available to the strategic planning team.

Planning teams should use this framework to at least gain insight into their own previous inclination towards the environment, and consider alternatives.

For more on the research on environmental scanning see Chun Wei Choo, Environmental scanning as information seeking and organizational learning.

Return from External Analysis to SWOT Analysis.

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